Risk sentiment seeps out of the market, as China disappoints, and the Fed looms large

Equity indices are on pause, and global indices are a sea of red on Tuesday. Sentiment drained from the Hang Seng at the start of the China National People’s Congress. The Dax is lower after Bayer, the pharmaceutical and biotech company, reported earnings and a soft forecast for 2024, amid a broader slowdown for the pharma sector. Overall, equity markets are jittery ahead of some key event risk this week including the Fed Governor’s semi-annual testimony to Congress, an ECB meeting and an NFP report.

China sets ambitious targets, but no plan to support them

China’s growth target for 2024 has underwhelmed the market. The target has been set at 5% and is a showpiece of the National People’s Congress. However, the 5% target is considered ambitious, and analysts had expected a more modest and easier to achieve target of 4.6%, ahead of this meeting. The Hang Seng slumped 2.6%, its largest daily decline for a month, even though on-shore China stocks on the CSI 300 rose by 0.7%. Beijing has acknowledged the challenges facing China’s economy, however, it also set a 3% inflation target, which means that China has to achieve nominal growth of 8% to reach the 5% target. It is also worth noting that China remains steeped in deflation, the annual rate of CPI was -0.8% in January, and PPI is expected to remain at -2.5% for February, suggesting that there is more deflation to come in the pipeline, which will make strong economic growth harder to achieve this year.

Three developments to watch from the NCP

Aside from the forecasts, there were three developments in the work report delivered by the Chinese Premier. Firstly, China will issue 1 trillion yuan, $139bn, of ultra long special bonds, which could lead to more payments to local governments to boost regional growth. There were also signs that Beijing is willing to tweak its 3% fiscal deficit target and could boost centralised spending in an effort to reach the growth target later this year. Added to this, authorities also vowed to stop overcapacity in some industries, in an effort to boost profit levels. While these are steps in the right direction, it is still difficult to ascertain how they will directly impact the Chinese economy and the sectors within it. The market reaction to the NCP so far is a sign that confidence around China remains weak, which could limit upside for Chinese shares, and for the Hang Seng in particular. It also highlights how central the US remains to global growth more generally.

When tech goes sour: Apple’s share price slumps as it faces multiple battles

Apple has been dealt a double blow in a mere 24 hours. First it was slapped with a billion euro fine from the EU then it was announced that Apple is no longer the top selling smartphone maker in China, and it has been replaced by Vivo. It now ranks fourth, and its market share has fallen 7%, with iPhone sales falling 24% in the first six weeks of this year. Apple’s share price futures are expected to fall another 1.5% when US markets open later today, after declining more than 2.5% on Monday. The fallout from the collapse in iPhone sales in China is not only bad news for Apple, but for the entire ecosystem that makes iPhones. For example, in Europe, key Apple supplier include STMicro, Varta and Soitec are all lower on Tuesday. In the US, futures prices indicate that Broadcom is lower by 1.2%, Micron is lower by 1.5% and Qualcomm is down by 0.7%.

UK: all eyes on the Budget, as growth pulls back a touch

Elsewhere, in the UK, there was some signs of a softening in the economic data for last month. The BRC like for like retail sales report for February was weaker than expected, rising by 1%, down from 1.4% in January, and lower than the 1.6% expected. The UK services PMI was also revised lower for February, to 53.8, vs. 54.3 initially. This also lowered the final composite PMI reading for February, which fell to 53, from 53.3. This is still the highest reading since May 2023, and new orders also rose last rose month, which is a sign that the economy remains strong. Overall, the February PMI surveys are still in expansionary territory, and they suggest that the UK economy bounced back in Q1, but maybe not as much as initially expected. GBP/USD has fallen back from the $1.27 highs reached on Monday; however, the move has been mild, and we may see this level come into view later this week. Wednesday’s Budget is now in focus for UK asset prices. If the Budget looks like it could boost growth, then we could see a surge in short-term UK bond yields. The 2-year UK Gilt yield is down by 40 basis points since mid-February. Bond prices are at risk (yields could rise) if Jeremy Hunt is too lose with the purse strings. If bond yields rise on the back of the budget then this could put upward pressure on GBP, and help it to get out of its long-term range between $1.2550 and $1.2800 on the upside.

Chart: GBPUSD remains range bound for now

Source: Xstation, XTB

EUR/USD is also down a notch, after producer prices for the currency bloc were weaker than expected. They fell by 0.9% in January, the annual rate was -8.6%, recovering slightly from the 10.7% decline in December.