Wall St and oil dive as investors fret over rates, China

By Pete Schroeder

WASHINGTON (Reuters) -U.S. stocks fell Tuesday, and oil slid over 1% as investors found fresh concerns over whether the Federal Reserve was done hiking interest rates and the resilience of China’s economy.

All three major U.S. equity indexes were down in midday trading, after a stronger-than-expected report on U.S. retail sales data. The U.S. Commerce Department reported that U.S. retail sales had increased by 0.7% in July, ahead of the 0.4% boost economists had anticipated, leading investors to wonder if the Fed may have longer to go on its rate-hiking campaign to tame inflation.

The Dow Jones Industrial Average and S&P 500 were both down 0.85%, and the Nasdaq Composite dropped 0.71% in the early afternoon.

The MSCI world equity index, which tracks shares in 45 nations, was last down 0.75%.

“Given the fact that we are so hyper-vigilant about the Fed and what their next step will be in September, it isn’t surprising that the market reacted with jitters, given that the retail sales number might indicate that the Fed would continue to raise rates,” said Peter Anderson, founder of Andersen Capital Management in Boston.

However, others argued the single surprise in economic data is likely not enough to fundamentally change Fed thinking.

“Yields on both 2-year and 10-year treasuries moved a bit following the report but the sales data do not support any material change in expectations for the next Fed meeting,” said Jeffrey Roach, chief economist for LPL Financial.

U.S. 10-year Treasury yields briefly hit 10-month highs, reaching as much as 4.274% earlier in the day before dipping back to 4.20% later.

Elsewhere, concerns about the strength of China’s economy weighed on oil markets, where crude dipped by nearly 2% on sluggish economic data from the country and concerns Beijing’s surprise rate cuts were insufficient.

Brent crude was last down 1.9% at $84.57 a barrel, while U.S. crude fell 2.21% at $80.69 per barrel.

Cuts to China’s one-year loans to financial institutions, at 15 basis points, were the largest since the outset of the COVID pandemic. Industrial output and retail sales growth both slowed from a month earlier to a year-on-year pace of 3.7% and 2.5% respectively, missing expectations.

“Globally, markets are right to be concerned about where China growth is going in the current quarters,” said Chris Scicluna, head of research at Daiwa Capital Markets.

Russia’s central bank, meanwhile, hiked its key interest rate by 350 basis points to 12%, an emergency move to try to halt the rouble’s recent slide after a public call from the Kremlin for tighter monetary policy.

The rouble pared gains after the decision to stand 0.6% weaker at 97.09, but still significantly above lows near 102 on Monday which had not been hit since the early weeks after Russia invaded Ukraine.

Emerging markets remained in focus a day after Argentina devalued its currency by nearly 18%, while Russia’s central bank on Tuesday raised interest rates by 350 basis points at an extraordinary meeting following a fresh slide in the rouble.

The dollar index, which tracks the greenback versus a basket of six currencies, was roughly flat, down 0.08% to 103.102.

(Additional reporting by Tom Westbrook in Sydney and Anisha Sircar and Shashway Chauhan in Bengaluru; Editing by Ed Osmond, Bernadette Baum and Deepa Babington)