U.S. stock futures slip after disappointing China data, as debit-ceiling vote looms

What’s driving markets

Disappointing data from China — which showed its manufacturing sector contracting again in May and services activity growing at its slowest pace in four months — has triggered a risk-off mood across global markets.

“Growth slowdown fears have accelerated as the latest data from China shows a faltering recovery, knocking back sentiment on markets,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Fears of softer-than-expected demand from the world’s second biggest economy sparked selling in U.S. stock index futures, price declines for industrial commodities like copper
HG00,
-0.78%
and oil
CL.1,
-0.94%,
and falls in government bond yields as investors sought perceived safety plays. The dollar index
DXY,
+0.44%
rose 0.6%.

Hong Kong’s Hang Seng
HSI,
-1.94%
lost 2.5% to hit a six-month low and Germany’s DAX 40
DAX,
-0.28%,
which is usually sensitive to Chinese growth expectations, shed 0.4%.

“Far from being the powerhouse which will offset America’s slowdown, China’s economic recovery from the pandemic is looking more precarious. A cloudy geo-political landscape is also causing concern, amid ongoing chip wars and sanctions, after it emerged that China turned down a US request for their defence chiefs to meet on the sidelines of a summit in Singapore,” Streeter said.

Adding to the caution is a House of Representative’s vote on the U.S. debt ceiling deal expected later Wednesday. Analysts reckon the Fiscal Responsibility Act will be passed, but are wary of hiccups.

“[M]arkets have been taken by surprise on these [type of] votes before, even if all might look OK for the time being,” said Jim Reid, strategist at Deutsche Bank.

And another reason for traders to be wary on Wednesday are signs that drivers of the latest market rally are looking over-extended.

For example, Nvidia’s
NVDA,
+2.99%
14-day relative strength index, a gauge of share price momentum where a figure over 70 is considered in overbought territory, closed Tuesday at 85.

The NYSE FANG+ index
NYFANG,
+1.54%,
composed of the 10 most highly-traded big-cap tech companies, has an RSI of about 80 having jumped nearly 63% so far this year.

The surge in popular big tech has helped the S&P 500
SPX,
+0.00%
gain 9.5% in 2023. But much of the rest of the market has suffered from worries about stubborn inflation, higher interest rates and a possible U.S. recession, and so the S&P 500 equally weighted index
SP500EW,
-0.20%
is down 0.6% over the same period.

U.S. economic updates set for release on Wednesday include the Chicago Business Barometer for May, due at 9:45 a.m., and the April job openings report at 10 a.m. The Federal Reserve Beige Book of company anecdote will be published at 2 p.m.. All times Eastern.