Posted Apr 25, 2022, 1:52 PMUpdated on Apr 25, 2022, 4:08 PM
Relief over Emmanuel Macron’s re-election was no match for fears of a global economic slowdown. The Paris Stock Exchange started the week down sharply, the CAC 40 index dropping more than 1.8% in the middle of the afternoon, to 6,460 points.
Investors are brooding and all of the world’s financial centers are sinking into the red. European markets fell in the middle of the day: -1.1% for the German DAX, -1.5% for the London FTSE and -1.4% for the pan-European STOXX 600. Wall Street for its part began a fourth session in a row in the red, with losses of around 0.8% for the S & P 500 and the Nasdaq.
On Monday morning, global markets as a whole were shaken by news from China, where the fight against the Covid epidemic threatens economic activity more than ever.
“Global growth fears”
A wind of panic shook the Chinese markets as Beijing in turn is threatened by the pandemic. The first confinements have been put in place in a district of the capital which is home to more than 20 million inhabitants. The Chinese markets of Shanghai and Shenzhen suffered their biggest drop since the beginning of March 2020 (almost -5%) on Monday. The CSI 300 has fallen back to its April 2020 level. It has lost more than a third of its value since its February 10, 2021 peak.
“Global growth fears overshadowed Macron’s victory,” UniCredit analysts say. “Nervousness is mounting over demand dynamics from Asia’s largest economy,” they note. Evidenced by the relaxation of commodity prices. But the weakness of oil, iron ore or aluminum at the start of the week is not necessarily good news, because it is above all linked to the fear of a major economic slowdown.
The prospect of a collapse in Chinese demand is all the more worrying, as it comes on top of the generalized tightening of monetary policies around the world. The Fed and the ECB have clearly expressed their desire to be aggressive in fighting inflation, even if it means sacrificing economic growth. These same concerns explain the unexpected and spectacular movement of easing on bond yields: investors doubt the ability of central banks to continue raising their key rates over time in the face of the deterioration in activity. The yield on the French 10-year OAT fell 10 basis points to 1.31% at midday.
The fight against the priority pandemic in China
“Beyond the impact of the war in Ukraine, the ability of the Chinese economy to rebound from the Covid-induced slowdown will be key to the recovery of exports, the engine of the European economy, the year forthcoming”, emphasizes Gilles Moëc of Axa IM. In China, “the authorities find themselves faced with the same trade-off as Western countries over the past two years: continue generalized confinements at significant economic costs or accept higher mortality”, he explains.
The fight against the pandemic remains the priority for the moment. But the Chinese authorities are well aware of the danger hanging over the local economy and financial markets. They have multiplied the calls of the foot to financial institutions to encourage them to lend more and to support local communities or real estate developers. The government has also encouraged households to invest, and announced the implementation of a pilot program of funded retirement products, benefiting from tax incentives, in a few towns across the country.
It remains to be seen whether these measures will be enough to counterbalance the deleterious impact of the confinements. For now, investors doubt it.