Global stock markets experienced a downturn on Wednesday as investors awaited the release of crucial U.S. inflation data, while the dollar saw a slight decline following reports of deflation in the Chinese economy. The anticipation of the upcoming Consumer Price Index (CPI) report for June led to cautious trading on Wall Street, with concerns that the data could reveal a higher inflation rate despite recent dovish statements from Federal Reserve officials. Market experts forecast the CPI to show a marginal uptick in July’s headline inflation to an annual rate of 3.3%, while the core rate is expected to remain steady at 4.8%, according to a Reuters economist poll.

Moody’s Ratings Cut Sparks Sell-off, Fed Comments Play Role

A significant sell-off on the previous day was triggered by Moody’s decision to downgrade the ratings of ten small and mid-sized U.S. banks. This move cast a shadow over the market, which was already grappling with elevated equity valuations and rising interest rates, following a surprise downgrade of U.S. government debt by Fitch. James Ragan, Director of Wealth Management Research at D.A. Davidson in Seattle, attributed the ongoing market consolidation to the lack of such activity in recent months. He highlighted a rotation away from the technology-centric sector as an underlying trend.

Tech Stocks Lead Decline, Global Markets Face Pressure

Notably, the decline on Wall Street was largely driven by Nvidia (NVDA.O) and other major tech stocks that have fueled this year’s rally. The global market gauge, MSCI’s index of stocks worldwide (.MIWD00000PUS), concluded with a 0.30% decrease. On Wall Street, the Dow Jones Industrial Average (.DJI) experienced a 0.54% drop, the S&P 500 (.SPX) lost 0.70%, and the Nasdaq Composite (.IXIC) recorded a significant decline of 1.17%.

European Markets Show Mixed Response, Banking Tax Reassures Investors

In Europe, the pan-regional STOXX 600 index (.STOXX) saw a 0.43% increase following Italy’s announcement that a new tax on banking profits would not exceed 0.1% of a bank’s assets. This assurance relieved investors who had anticipated a higher charge of up to 0.5%. However, concerns remain about the global trend of imposing taxes on banking windfalls. European bank stocks (.SX7P) witnessed a 1.01% rise, and Italy’s FTSE MIB share index gained 1.31%.

China’s Economic Data Highlights Challenges, Yuan’s Recovery

Chinese economic data unveiled a continuous decline in producer prices for the tenth consecutive month in July, alongside the country’s consumer price index slipping into deflation for the first time since February 2021. This data followed disappointing trade figures from China on the preceding day. The Chinese economy’s slowed post-pandemic recovery, attributed to weakened demand both domestically and internationally, has raised concerns about entering an era of sluggish growth similar to Japan’s “lost decades.”

Alleged dollar selling by state-owned Chinese banks led to the yuan’s recovery from a month-low, accompanied by the Chinese central bank’s unexpected exchange-rate fixing, signaling discomfort with recent yuan depreciation. The dollar fell 0.15% against the yuan and the dollar index, which measures its performance against six other major currencies, slipped 0.04%.

Treasury Yields Fluctuate Amid Government Debt Sale

Amid choppy trading, Treasury yields experienced fluctuations before the U.S. Treasury Department’s sale of $38 billion in 10-year notes, yielding 3.999%. This sale served as a test for government debt demand after yields surged the previous week. The benchmark note’s yield later declined by 0.6 basis points to 4.018%, while two-year notes, which often reflect interest rate expectations, saw a 5 basis point increase to 4.808%.

Oil Prices Reach New Highs, Gold Slips Ahead of Inflation Data

Oil prices reached new heights as the global Brent benchmark hit its highest point since January. This increase was driven by a substantial reduction in U.S. fuel stockpiles and tighter supply due to output cuts by Saudi Arabia and Russia. U.S. crude futures rose to $84.40 per barrel, while Brent settled at $87.55, its highest level since January 27.

On the other hand, gold prices experienced a slight decline as investors remained cautious ahead of the U.S. inflation data release. U.S. gold futures settled 0.5% lower at $1,950.60 per ounce.