Wall Street stocks slip after China softens Covid policy

US stocks fell on Wednesday, all but erasing hopes of a festive rally to end a dire year for equities, though Hong Kong-listed shares climbed as China eased its zero-Covid restrictions.

Wall Street’s benchmark S&P 500 fell 1.2 per cent, while the tech-heavy Nasdaq Composite fell 1.4 per cent.

The National Health Commission in China on Monday said it would drop quarantine requirements for inbound travellers from January 8, having earlier this month scrapped the requirement for positive Covid-19 cases to quarantine at centralised facilities. The decision has bolstered stocks in Hong Kong this week, but fears about a renewed spread of the virus have hampered US equities.

The US on Monday said that it would require air passengers from China to present negative Covid-19 tests to enter the country, as cases have surged in China. Officials estimate that roughly 250mn people, or 18 per cent of the population, were infected with Covid in the first 20 days of December.

Hong Kong’s Hang Seng index added 1.6 per cent, with all sectors apart from real estate in positive territory. The index is set to finish the year 14 per cent lower but has risen by a third since the end of October as Beijing has loosened pandemic restrictions that have constrained China’s economic growth since early 2020.

Iris Pang, chief economist for greater China at ING, said Beijing’s relaxation of its zero-Covid policies would boost domestic consumption and travel-related industries in particular, even as economic growth in Europe and the US slowed, denting international demand for Chinese goods.

“Our house view is that the US and Europe could enter a mild recession in the first half of 2023,” Pang said. “We therefore expect that the Chinese government will increase fiscal strength to support the domestic economy by continuing construction of uncompleted home projects and plans for more transport, energy and technology infrastructure.”

US stocks have plummeted this year as the Fed has ratcheted interest rates higher in its quest to stamp out inflation. The S&P 500 is down 20.6 per cent so far this year, on track for its worst annual performance since 2008. Because of tech stocks’ particular sensitivity to higher interest rates, the Nasdaq has been hit harder, down 34.7 per cent this year, also on track for its worst performance since 2008.

Officials at the Federal Reserve have hinted that high rates of inflation mean US interest rates may have to rise above 5 per cent, from the current level of between 4.25 per cent and 4.5 per cent.

“We came in hoping for a seasonal rally, and that didn’t come,” said Steve Holt, head of international equity sales at Baird. Tesla’s stock has fallen 40 per cent in a month, Apple has plunged 11 per cent and Amazon is down 11 per cent.

“I’ve never seen the Fed so aggressive against the market in 30 years,” Holt added. “Value investors, those who want to get rich slower, are having a better time of it.”

Commodity prices declined, with Brent crude, the international oil benchmark, settling down 1.3 per cent at $83.26 a barrel.

Prices for shorter-term, interest rate-sensitive US Treasuries were stable, with the yield on the two-year note down 0.01 percentage points at 4.36 per cent. The yield on the benchmark 10-year note added 0.03 percentage points to 3.88 per cent — its highest level since early November. Yields fall as prices rise.