Xi’s “whatever it takes” moment?
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
Chinese stocks had their strongest week since 2008 after extensive new economic stimulus was unveiled and the authorities hinted strongly that more was to come. The news from China boosted the MSCI EM Indexi, which rose 6.2% on the week (in USD). This was better than the S&P 500ii, up a mere 0.64% on the week as the impact of the Fed’s swich to monetary easing seemed to fade. The release ofbenign PCE inflation led to further steepening of the yield curve. Increased pressure on the ECB to consider cutting rates next month led to a rally in euro area government bonds, while news that French public debt had reached 112% of GDP ensured that yields on French five-year bonds traded at higher yields than their Greek and Spanish equivalents. In currencies, sterling strengthened further against the USD and euro given the Bank of England’s relative caution on rate cuts while in commodities, copper prices recovered on news of the Chinese stimulus, but oil slumped, in part because Saudi Arabia announced increases in output.
GEOPOLITICS
Israel’s strike on Hezbollah’s headquarters, killing its leader, will likely have profound implications for Middle East stability. We are overweight gold.
KEY DATA
Flash readings for S&P Global’s composite purchasing managing index (PMI) for the euro area declined to 48.9 in September from 51.0 in August, suggesting a contraction in business activity. The main weakness was in manufacturing (down to 44.8). The services PMI also fell (to 50.5). S&P Global’s flash composite PMI for the US came in at 54.4 this month, little changed from 54.6 in August, with positive business sentiment concentrated in services. The final estimate for Q2 GDP growth came in unchanged at an annual 3.0%, while the Fed’s favourite inflation gauge, the personal consumer expenditure index, dropped to an annual 2.2% in August from 2.5% in July. Consumer prices excluding fresh food rose at an annual 2.2% in the Tokyo region in September, down from 2.6% in August.
MARKET VIEW
China’s bumper stimulus package, including central bank forward guidance for the first time, are good short-term for equities but further fiscal stimulus is needed to stabilise housing and restore consumer confidence.
In the United States, payrolls data this week will be key for markets as the Fed pays close attention to the labour market. We need a pick-up in private payrolls for markets to fully believe in a successful soft landing. We expect the Fed to cut rates by another 50bps in November and by 25bps in December. A potential US port strike this week could jolt the economy.
As reporting season gets going, a US chip maker gave an upbeat forecast while a fashion chain warned on its profit target, supporting our theme of moving from consumer to producer stocks. Our 2024 theme of M&A was supported by reports that a leading watchmaker could be taken private.
On policy, Donald Trump’s threat to penalize a US farm equipment maker if it doesn’t abandon plans to move some production to Mexico shows his willingness to hit companies with tariffs. In Japan, the new LDP leader supports an “Asian NATO” and a stronger yen. Abenomics is dead.
