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Markets and macro insights with Bernard Swords, Chief Investment Officer
China was the main talking point in equity markets last week. Why was that?
- There was a range of policy measures announced last week to ‘jump start’ the Chinese economy: official and mortgage interest rates were cut; reserve ratios for the banks were increased, allowing them to lend more; and regulations relating to house purchases, loan-to-value ratios and minimum down-payments were eased.
- The politburo, the Chinese cabinet, has committed to achieving 5.5% growth in 2024, but it fell short of announcing any new fiscal measures to achieve this target.
- The monetary measures are welcome but could be considered as ‘more of the same’ which, thus far, have not changed the trend in China. We will wait to see if fiscal policy will also be used to boost aggregate demand immediately before we change our negative position in the region.
- These developments drove the world equity index up 1.6% in euro terms last week and dominated market moves. The Chinese market itself was up over 17% while the Asia Pacific region was up nearly 7%. The euro area showed its sensitivity to China, rising over 3% last week. By contrast, the US was quite subdued, up a mere 0.8%.
- China-sensitive sectors were the leaders. The Materials sector was the strongest driven by a resurgence in the prices of industrial metals. Consumer Discretionary was next as the Luxury and Motor sectors jumped on better China sentiment. Industrials were also strong in anticipation of stronger capital investment in China.
- This sector performance would not suit our positioning – and we would be wary of following these trends as there must be more concrete fiscal actions from the Chinese government to support this change in performance.
What other economic data releases were in focus last week?
- In the euro area, the composite PMI index (the leading business confidence index) fell by 2.1 points in September to an eight-month low of 48.9, well into contractionary territory. There were significant falls in both the manufacturing and services indices although the services index is still above 50 indicating some level of expansion.
- The euro area does seem to be stagnating again; a buoyant China would help but it probably needs fiscal and monetary support within the region as well. The latter is possible, the former looks distant.
- Across the Atlantic, sentiment indicators from the US were not much better. The Conference Board consumer confidence survey dropped 6.9 points to 98.7, leaving it at a three-month low and well below consensus expectations for an improvement to 104. However, as we pointed out in a previous edition of Chart of the week, actual consumer behaviour is quite different to what consumer confidence would indicate. We need to watch it, but we would not read too much into it.
The week ahead: what to watch out for
It will be a busy week ahead with the US likely to be centre stage. The big release will be the jobs report (Non-farm Payrolls). How healthy, or otherwise, is the US labour market? The main business sentiment surveys (the ISMs) will also be released, so we will get a good feel for how corporate America is feeling. The main business sentiment surveys (the PMIs) will be released in China although markets will be focussed on policy changes rather than the current health of the economy. In the euro area, inflation will be released: will there be room for more cuts from the ECB?
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