A wave of stimulus follows investors into Q4

China stimulus boosts markets, as French CPI sours

This time last week, the main focus was the Fed and its 50bp rate cut. This was considered a boon for stock markets and risk appetite. However, the Fed-driven rally has been left in the dust by China’s week-long give away to markets, with rate cuts, help for the property sector, a fund to buy domestic equities and the promise of fiscal stimulus and more support for the economy. This is exactly what the market was looking for. It is also the trigger for a broadening of the equity market rally beyond the US tech sector. Weaker French CPI also raises the prospect of an ECB rate cut in October, thus a wave of stimulus seems to be following investors as we move towards Q4.

The stock rally broadens out

It's been another strong day for Chinese shares, the Hang Seng is higher by 2.33%, and the CSI 300 index is higher by more than 3.5%. The stimulus package from Beijing has helped Chinese shares to reach 1 trillion-yuan turnover for the third consecutive day, and this massive boost in volume has meant that the Shanghai stock exchange has experienced problems yet again. Even so, China’s massive stimulus package has unleashed massive animal spirits. The CSI 300 is higher by 14.7% in USD terms in the last 5 days, the Hang Seng is higher by 11.5%. European stocks have also benefited, although the gains are much milder for Europe compared with Asia. The Eurostoxx 50 index is higher by 1.8% in the last 5 days, however, the FTSE 100 is down by 0.5% on a USD basis, as the energy sector takes a hit from volatility in the oil price.

China plays catch up as region gets a boost from Beijing

The scale of China’s stimulus plan is unprecedented, as Beijing has usually avoided monetary and fiscal support for the economy. The US-style measures announced this week, has also helped Chinese and Hong Kong shares eclipse US shares. The S&P 500 is higher by 0.56%, the Nasdaq is higher by 0.98% in the past 5 days, and the Dow Jones is the laggard, rising by 0.3%. It’s been a strong Q3 for US stocks, the S&P 500 is higher by 5% so far in Q3, and the Dow Jones is up by more than 7%. However, trading is a global game, and the strong positive reaction to the Chinese stimulus could see a wave of capital head to Asia, if this rally is only getting started.

Golden Dragon Index flies high

US-Listed Chinese shares have also had a blistering rally. The Nasdaq’s Golden Dragon Index, which includes US-listed Chinese tech shares, has surged this week and it is at its highest level since May. Volume and interest in the Golden Dragon Index has also soared, and daily volume is at its highest level for more than a year. The index is higher by more than 18% so far this week.

Why UK indices have missed out on the rally

As we mentioned on Thursday, UK indices have mostly missed out on the global market rally this week. This is an opportunity missed for the UK indices, and the FTSE 100 is underperforming other European and US indices YTD. Europe’s luxury names and car brands have also been favored by investors this week. A slowdown in European CPI for September, could boost expectations of another ECB rate cut in October, which may help European equities as we move towards Q4.

The Brent crude oil price has experienced a 4% decline in the past 5 days, driven by a few factors including reports that Saudi Arabia had abandoned its $100 oil price target, more supply coming on board from Libya and a potential ceasefire between Israel and Lebanon. This has weighed heavily on BP and Shell. They are the two weakest performers on the FTSE 100 in the last 5 days, and they are lower by 8% and nearly 7% respectively.

British Land returns to the FTSE 100

It's also worth noting that British Land will return to the FTSE 100, after Darktrace leaves the index as it is being taken private. It’s a sad day that another tech firm is leaving the FTSE 100, the fact that it is being replaced by British Land, a property development company, says a lot about the make up of the British index, and its dearth of tech firms. We can make fantastic tech firms in the UK, but we seemingly can’t keep them.

Yen rallies as new Japan PM announced

Elsewhere, in Japan the Nikkei has now erased all losses since the July rate cut. The focus on Friday has been politics, Japan will get a new Prime Minister, Shigeru Ishiba, after the Liberal Democratic Party leadership contest. His rival advocated looser monetary policy, which could have clashed with the BOJ’s plans to normalize monetary policy and hike interest rates. However, Ishiba is considered neutral for the current policy path. This has weighed on USD/JPY, and the yen has strengthened. USD/JPY is currently down by 2% on the back of this news and is trading around 144.

US economic data in focus

US economic data is also in focus on Friday. Personal income and savings data will be released at 1330 BST, however, core PCE data for August will be key. Bloomberg expects personal income to tick higher, but for spending to have eased to 0.3% in August, compared to a 0.5% gain in July. This could boost the personal savings rate to 5.1% for August. The core PCE index is expected to tick higher to a 2.7% YoY rate, up from 2.6% in July.  We expect core PCE to be in line with expectations, or even a touch lower. This will justify the Fed’s 50bp rate cut last month. Added to this, the increase in the savings rate and the reduction in spending, could show that the Fed’s move was prudent. Consumer confidence is also worth watching, will the Fed rate cut have boosted confidence, which has been below the 5-year average in recent months?