Since China announced a raft of new economic stimulus measures (the largest of its kind since the Covid era), Chinese stocks have been going on a tear. In fact, virtually all of the CSI 300 index’s year-to-date gains (28%) have been made in the past week. Measures including cuts to the RRR, reducing mortgage rates on existing loans and lowering the downpayment size were all initially received with great enthusiasm, however there are signs that this is starting to fade.
The Hang Seng slumped 9% on Tuesday, with investors disappointed that no further details were provided by authorities. So, where does that leave us? The recent measures announced were a step in the right direction, but the jury is still out regarding whether the measures will function as a genuine catalyst for growth or whether they will just be a safety net preventing further economic downside. I suspect that we will need to see more cuts in coming months to the LPR rates to keep things on track for China to hit the 5% GDP target, while the wait continues for a broader, harder-hitting fiscal package to jumpstart the economy. Overall, the latest measures may help to shore-up parts of the economy but whether it is enough to cause a turnaround from deflation to an inflationary price environment remains to be seen.
More broadly speaking, global equity markets are grappling with conflicting signals regarding the path of US interest rates. Investors have been in good spirits since the Fed delivered a 50bp cut in September. But since then, a strong jobs report (i.e. the NFP figures from last Friday) and higher oil prices have thrown up some inflationary questions which could give the Fed some headaches at their November meeting if the trend higher on both fronts (i.e. jobs and energy prices) continues. This week, US inflation data will be the marquee macro-event, and if that does happen to produce a beat to the upside, some doubts may start to creep in about the extent of Fed rate cuts we could see between now and year-end.
The USD has been enjoying October so far, with the greenback revelling in the aftermath of the strong NFP (Non-farm payrolls) print while at the same time getting an assist from escalating treasury yields. The 10-year US Treasury note has moved back above the 4% yield level, which is increasing the buying flows for the USD. This is reflected in the Dollar Index (DXY), which has rallied around 2.5% from its September lows, with investors now losing hope of seeing another 50bp cut delivered from the Fed at the November meeting.
The gold momentum has started to stall in the face of rising treasury yields and a rebound in the USD. The precious metal slipped below support at $2638, to trade at around $2620 during Asian trading hours on Wednesday. However, buyers remain keen on gold given the geopolitically uncertain landscape which is thus far containing the size of the price slide. If selling pressure continues, support at $2597 could come into play, while resistance awaits at $2645.
Oil is highly volatile with investors waiting anxiously to see if Israel takes aim at Iran’s energy facilities. Having gained $12 since late September, US crude fell 4% as some risk premium was removed from the price due to no news regarding retaliation from Israel. Choppy trading is expected to continue for the oil market which remains headline-driven, but in the short-term an upside price bias remains in the absence of any de-escalation efforts.
