Fears over Chinese banks drive markets lower

Today’s US opening call provides an update on:

  • Fears over Chinese banks drive markets lower;
  • Corporate earnings in focus on Wednesday;
  • Eurozone consumer confidence expected to improve again;
  • BoE minutes show upward revision to growth forecasts.

European indices are trading lower on Wednesday, following reports over night that the number of bad loans being written off by China’s largest banks have tripled.

This has reignited fears over China’s shadow banking system and whether the People’s Bank of China will be forced to raise interest rates in order reign in it. Earlier this year we saw a significant spike in lending rates, which saw some shadow banks lending at more than 20%.

If we do see a tightening of monetary policy from the PBOC, it could choke off the recovery being seen in the world’s second largest economy, which in turn would impact growth globally. Given that the global recovery is still fragile, with the US repeatedly shooting itself in the foot and the eurozone constantly on the verge of another crisis, investors are very concerned about what kind of an impact this latest Chinese issue could have.

Over in the US we’re seeing index futures also trading lower this morning, paring yesterday’s gains which came following the release of the US jobs report. Further proof that the US economy isn’t performing as well as the Fed had hoped has helped propel markets higher over the last month, as this only reduces the probability that the Fed will taper later this year.

This afternoon, there’s very little economic data being released from the US, so attention is likely to remain on corporate earnings season. There are a number of major companies reporting earnings on Wednesday, which could provide key insight into how the economy performed in the third quarter, as well as how it is expected to perform in the current one. Among those reporting we have Caterpillar, Boeing and AT&T.

In the eurozone, it’s been relatively quiet so far. There’s a number of PMIs to look forward to tomorrow morning, but today all we have is the consumer confidence figure for October. We’re expecting a ninth consecutive improvement here, with the figure rising to -14.4. This is still in negative territory, which shows consumers remain pessimistic, but the fact that we’re seeing a consistent improvement must be a positive thing.

The minutes from the Bank of England didn’t provide us with any information we didn’t already know. The bank upgraded its growth forecasts for the UK this year, which is no surprise given the improvements across the board in the economic data. The improvement in the data and the unemployment rate, has prompted concerns about interest rates, with the BoE previously stating that rate hikes wouldn’t be discussed until unemployment falls to 7%.

The market has taken this to mean that rates will be hiked at this stage, making the BoEs three year guideline irrelevant. Policy makers have tried to ease concerns over this by claiming that rates will only be discussed at this level but it looks as though the forward guidance will have to be modified in the future if investors, consumers and businesses are going to accept it.

Ahead of the open we expect to see the S&P down 8 points, the Dow down 72 points and the NASDAQ down 21 points.


Craig Erlam is Market Analyst at Alpari (UK). He joined Alpari (UK) at the beginning of 2012 after four years in the financial services industry, including working at Goldman Sachs. Craig writes market commentary that regularly appears on websites including The Financial Times, Reuters, BBC, The Telegraph and FOX Business. He also provides insight and analysis for clients which he posts daily on Twitter and the Alpari (UK) website. You can also find Craig on YouTube where he gives short market updates, including charting analysis.

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