S&P 500 Futures Weaken as China’s Economic Concerns Resurface

Early Monday sees a subdued risk appetite as reports from China over the weekend cast further shadows on the world’s second-largest economy and the global economic landscape. Geopolitical tensions involving Russia and recent robust US data have also contributed to the prevailing sentiment, stoking fears of a potential September rate hike by the Fed, despite current interest rate futures suggesting otherwise.

Reflecting this sentiment, the S&P 500 Futures remain under pressure at 4,480, retracing a modest rebound from the prior day’s one-month low. Concurrently, the yield on the US 10-year Treasury bond advances on a three-day upward trajectory, reaching 4.18%, as bond bears eye the annual peak established earlier in the month.

China’s economic challenges come to the forefront as Country Garden suspends its bond trading activities and select companies within the nation raise complaints about non-payment from a subsidiary of the Chinese conglomerate Zhongzhi Enterprise Group. These issues reignite concerns over debt, with Country Garden’s debt restructuring efforts leading to record-low levels for the company’s bonds and prompting a halt in bond trading. Similarly, ongoing talks of a liquidity crisis within Zhongzhi Enterprise Group find validation in these recent actions, amplifying the apprehensions of market participants.

Meanwhile, ongoing tensions stemming from the US-China trade conflict and Russia’s engagement in firing warning shots at a warship in the Black Sea contribute to the ongoing turmoil in the market’s risk sentiment.

It’s important to note that the strengthening US Treasury bond yields and positive US data have buoyed the US Dollar Index (DXY), placing downward pressure on commodities and currencies like the Antipodeans.

Regarding recent data releases, while the July US Consumer Price Index (CPI) figures failed to significantly impact expectations of a Fed decision in September, the underlying CPI details and other indicators of price pressure have maintained optimism among USD buyers. Notably, the preliminary readings of the July US Producer Price Index (PPI), the August University of Michigan Consumer Sentiment Index (CSI), and the 5-Year Consumer Inflation Expectations for the same month supported the USD’s performance on Friday. Furthermore, the one-year inflation outlook for the US saw a minor dip from 3.4% to 3.3%.

In terms of central bank outlook, Federal Reserve (Fed) Governor Michelle Bowman expressed support for additional rate hikes and defended the stance of the Fed hawks. Conversely, San Francisco Fed Bank President Mary Daly, Philadelphia Fed Bank President Patrick Harker, and New York Fed President John Williams indicated potential rate cuts in 2024, emphasizing data-dependency and underscoring the policy doves’ need for further details to solidify their stance.

Looking ahead, China’s Industrial Production and Retail Sales figures for July, set to be released on Tuesday, will serve as crucial indicators for initial market direction leading into Wednesday’s housing data. Of greater significance, Tuesday’s US Retail Sales for July and Wednesday’s release of the Minutes from the most recent Federal Open Market Committee (FOMC) monetary policy meeting will provide substantial insights for shaping future market perceptions.