Chinese stocks have lift off: +19% in September, +30% year to date
The soft landing is supported by economic data, with low unemployment boosting consumer spending. Consumption remains focused on occasional purchases rather than sustained growth. Central banks are expected to continue cutting rates as inflation slows.
In the US: Resilient economy
Economic growth is still strong at 3.0%. Consumer spending remains key to the economic recovery. Although many households are still under financial stress due to depleted pandemic savings, wealthier households still have spending power. Higher interest rates are impacting activity, especially in housing; however, the Fed’s rate-cutting cycle may ease the economic pressure. The 10-year Treasury yield rose as the labor market showed strength, with nonfarm payrolls up 254,000 and unemployment down at 4.1%.
In Europe: Slow growth keeps on improving
The economy could approach a 1% growth trend from the current 0.6%, driven by increased consumer spending due to improving real incomes and falling savings rates. Investment and manufacturing are still weak but may improve as interest rates drop and global trade recovers.
In China: The bazooka stimulus is a game changer for economic growth and investor confidence
After China’s announcement of its latest coordinated policy measures, Chinese equities surged by 30% this year, reflecting rising investor confidence. The government’s stimulus actions are seen as a catalyst for unlocking value in China’s markets. Last week, China surprised global markets with significant policy changes aimed at boosting economic growth, stabilizing the property sector, and revitalizing stock markets. This joint effort by top regulators – People’s Bank of China (PBoC), China Securities Regulatory Commission (CSRC), and National Financial Regulatory Administration (NFRA) – prioritizes economic growth in order to reach the 5% target.
Equity: HSCEI (+19% in September, +30% YTD) broke 8,000. Next target could be 12,000 within 12 months (+50%), corresponding to pre-Covid and post-Covid levels. Investors continued to react to Beijing’s announced economic stimulus measures the first week of October. Meanwhile, the S&P 500 and Nasdaq 100 also posted solid gains in September, rising 2.0% and 2.5%, respectively, and contributing to YTD increases of around 20%. The S&P 500 rallied to an all-time high after the Fed began its rate-cutting cycle.
Fixed Income: Yields fell in September, with the 2-year US Treasury yield dropping by 28bps to 3.65% and the 2-year Germany bond yield declining by 34bps to 2.07%.
Currencies: In September, the EURUSD pair rose 0.8%, while USDJPY and USDRMB both fell over 1%, as the greenback continued to weaken against other major currencies.
Commodities: WTI oil declined 7.3% in September, while gold and copper gained 5.7% and 8.5%, respectively.
Bitcoin: The cryptocurrency performed well, gaining 7.1% for the month and a substantial 52.1% year to date.
China’s stimulus has significantly boosted foreign investor confidence, potentially prompting a shift of focus from US to Chinese equities. Although global equities have performed well in 2024, volatility has risen due to uncertainties surrounding growth, elections, and central banks. Defensive sectors have led recent gains, while cyclicals have lagged. Despite ongoing economic and geopolitical risks, robust earnings growth, lower interest rates, and increased artificial intelligence (AI) investments provide a supportive environment for equities.
In the US: Continuing positive backdrop for the equity market
US equities have been volatile over the last two months due to uncertainties around the upcoming presidential election, economic growth, and the Fed’s rate-cutting cycle. Despite this, stocks are still near all-time highs, and the outlook remains positive. Key factors supporting this view are healthy earnings growth, improving inflation, Fed rate cuts, and increased AI investments.
In Europe: Supportive macroeconomic backdrop with reasonable valuations
The macroeconomic backdrop remains supportive, with reasonable valuations, an improving domestic economy, and easing monetary policy. However, the recovery in earnings is slower than expected amid tepid economic growth. This year’s earnings growth expectations have been revised down from 3% to 0%. The bulk of the recovery is now anticipated to occur next year instead of this year.
In China: Maximum momentum: +19% for equities in September, +30% year to date
Chinese equities are currently valued attractively, with positive momentum, especially in technology, healthcare, and financial sectors, likely benefiting from increased liquidity and supportive policies. The introduction of a RMB 500bn (USD 71bn) swap facility for brokers and funds to purchase stocks, and a 20bp policy rate cut, has provided essential liquidity to the market. Additionally, a RMB 300bn (USD 42bn) refinancing facility has been established to support share buybacks, boosting investor confidence. With the Chinese equity market being the most underinvested globally, there is significant potential for a substantial upswing.
A combination of weaker economic growth and lower inflation in the US supports a more significant rate-cutting cycle and a weaker USD.
EURUSD: Down at 1.0975, back in the [1.05; 1.10] range
A further decline in euro interest rates, which are already lower than US rates, is putting downward pressure on EURUSD. The European Central Bank (ECB) is expected to continue cutting rates by 25 to 50 basis points per quarter through at least mid-2025.
USDRMB: 7.10, collapsing from its 7.30 all-time high and testing the 7.00 support
China’s recent strong government initiatives and foreign capital inflows into the Chinese equity market are likely to strengthen the RMB, weighing on the USDRMB pair. The renminbi is also benefiting from a significant balance of trade surplus, reaching USD 100bn per month, which could push USDRMB below 7.00 again, supported by strong trade fundamentals and expected US rate cuts. However, USDRMB is likely to stay above 6.30, as Chinese authorities reaffirmed their commitment to currency stability.
USDJPY: Drop from 162 all-time high to 140, then rebounding to 149
USDJPY saw a sharp decline from 162 to 140 after the Bank of Japan (BoJ) raised interest rates from 0-0.10% to 0.25%, triggering a yen short covering. The drop was further influenced by falling US yields. Incoming Japanese Prime Minister Shigeru Ishiba’s nomination initially boosted the yen due to expectations of BoJ tightening. However, Ishiba has since then softened his stance, recently stating that monetary policy should remain accommodative.
How to benefit from the cycle of declining interest rates?
The yield curves in USD and EUR are steepening, i.e. the slope is becoming positive (long-term rates > short-term rates). This means that there are now opportunities to lock yields for longer maturities. Yields are declining but are still high with respect to the levels of the past 15 years.
Bond yields remain elevated as overall bond credit spreads (i.e. the extra yield above government yields) are wider, reflecting some political unrest and uncertainty both in the US and Europe. Central bank rate cuts have started, and robust economic growth is maintaining low default rates. This environment presents an opportune moment to increase active bond exposure.
High interest rates can be locked for longer periods by investing cash in bonds from large Investment Grade banks, which can provide an income per annum of 5%+ net in USD and 4%+ net in EUR, with a duration of 5 to 10 years.
Gold: Close to the all-time high at USD 2,650/oz, up 28% YTD
Gold price rally may carry on, driven by strong central bank buying, increased ETF investor demand, and Fed rate cuts. Gold’s hedging qualities are expected to remain relevant in the current geopolitical context, further supporting prices. Physically backed gold ETFs saw inflows for the fourth consecutive month in August, bringing total holdings to 3,182mt, the highest level since the start of the year. Additionally, central banks are expected to maintain elevated net buying, projected at 900-950mt in 2024, thus supporting the ongoing demand for gold.
Oil: Stabilizing near USD 75/bbl with upside potential
Oil prices are expected to remain supported amid concerns over potential supply disruptions in the Middle East. Oil prices may recover above USD 80/bbl, helped by global interest rate cuts, which reduce recession risks, and the continued restraint from OPEC+.
Copper: Stabilizing near USD 9,800/mt
Copper prices have stabilized after reaching a 4-month low due to increased inventories and weak global manufacturing data. Despite ongoing demand concerns, the copper market is likely to remain in deficit, with prices possibly rising to USD 12,000/mt in 2025.
