Hopes of ‘Santa rally’ in US stocks fade as megacaps struggle

US stocks were battling to keep hopes of a year-end Santa rally alive as investor optimism about China’s reopening plans was countered by worries about the specific impact on some of the market’s biggest companies.

Beijing’s decision to scrap inbound quarantine requirements gave a general boost to shares on Tuesday, notably in China, as investors looked ahead to the world’s second-largest economy rebuilding supply chains and business ties that were strained during almost three years of pandemic isolation.

But individual stocks, including Tesla and Apple, were hit by concerns over disruptions to their China manufacturing operations amid a soaring number of Covid-19 cases.

By mid-afternoon, the S&P 500 had halved its early losses to stand 0.3 per cent lower while the tech-heavy Nasdaq Composite index was off 1.2 per cent.

In the US, a so-called Santa rally denotes gains over the last five days of trading in one year and the first two of the new year.

Apple shares slipped 1.9 per cent to below $130, hitting the lowest point since June 2021.

Tesla was Tuesday’s second-largest blue-chip loser in percentage terms, down 8 per cent. Reuters reported that in China, the electric vehicle maker was extending a reduced production schedule from this month into January.

The falls took Tesla’s December losses to 42 per cent, its worst month in at least 10 years, as investors worry also about a potential sales slowdown and the distraction for chief executive Elon Musk of running Twitter as well.

Southwest Airlines was another big faller, off 5.8 per cent, as the budget carrier struggled with continued disruptions from the extreme cold weather that hit large swaths of the US over the holiday weekend.

The tech gloom was countered by gainers among companies likely to benefit from China’s travel changes, notably casino operator Wynn Resorts, which has a big presence in the gambling hub of Macau. It topped the list of S&P 500 winners with a gain of 5 per cent.

China’s CSI 300 closed 1.2 per cent higher on Tuesday. Most other markets in Asia, including Hong Kong and Australia, remained closed.

The subdued performance rounds off a dire year in stocks, with a 19 per cent fall in the MSCI World index over the course of 2022.

“It will take a minor miracle for 2022 to not be the weakest year for global stock markets since the financial crisis of 2008,” said analysts at Nordic bank SEB in a note.

This year, global markets have been dominated by western central banks’ battle to curb high inflation via aggressive interest rate rises. Next year, some of the focus for investors is likely to shift to the impact of China’s rapid dismantling of Covid-era restrictions.

“The biggest story is what is happening in China,” said Neil Shearing, chief economist at Capital Economics. One long-term impact is likely to be on the dollar, as nerves surrounding China have formed one critical area of support this year, he added.

“Generally, when risky assets go up, safe assets like the dollar go down,” said Shearing, warning that “some optimism needs to be tempered though, [as] the path will be more bumpy than many are foreseeing”.

Elsewhere, UK markets were shut for a public holiday while in Europe, the Euro Stoxx 50 index closed 0.4 per cent higher.

Additional reporting by Patrick McGee

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