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Stocks dip on prospects of Chinese policy tightening

stock dip

Eurostoxx futures fell 0.2%, MSCI’s ex-Japan Asian-Pacific index dropped 1.2%, and Nikkei declined 1.1%

Stocks dipped on Thursday as a spike in short-term Chinese interest rates fanned worries about policy tightening in the world’s second-largest economy, although improving corporate earnings and easing market volatility helped stem losses.

U.S. bonds extended their decline, boosting the 30-year yield to its highest level since March, following stronger economic data and a push in Washington to pass a massive relief plan.

European stocks are expected to be steady to slightly weaker, with Eurostoxx futures down 0.2% and FTSE futures up 0.1%.

MSCI’s ex-Japan Asian-Pacific index fell 1.2%, led by drops in South Korea and China, while Japan’s Nikkei lost 1.1%, both snapping a three-day winning streak. U.S. stock futures slipped 0.25% in Asia.

A rise in Chinese short-term interest rates spooked risk assets, though analysts also noted position adjustments ahead of the Lunar New Year starting next week are likely to play a role too.

There’s persistent speculation that the Chinese authorities may want to tighten its policy, said Wang Shenshen, senior strategist at Mizuho Securities.

Higher interest rates raised worries Chinese policymakers may be starting to shift to a tighter stance to rein in share prices and property markets.

On Wall Street, the S&P 500 gained 0.10% while the Nasdaq Composite lost 0.02%. The NYSE Fang+ index of leading tech giants hit an intraday record high, thanks to 7.4% gain in Google parent Alphabet following its strong earnings.

Markets on the whole have calmed significantly in the past few days with the Cboe Volatility index slipping to its lowest levels in over a week.

As the retail trading frenzy seen last week faded, stock prices of GameStop and other social media favourites subsided, while silver also extended losses, having already wiped out gains made on Monday.

Expectations of a large U.S. stimulus package underpinned risk assets as the Democratic-controlled Congress sought to pass President Joe Biden’s $1.9 trillion COVID-19 relief package without Republican support.

While it is unclear how much compromise the Democrats are willing to make with Republicans who are calling for a smaller package, many investors expect additional spending of at least $1 trillion.

Either way, U.S. stimulus will push economic growth even higher after the first quarter and buoy risk market sentiment globally, said John Vail, chief global strategist at Nikko Asset Management.

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