The Valuation Tango

Stocks Climb Thanks To Better Than Expected US GDP

• The Nasdaq 100 slightly increased by 0.62%, the DJIA saw a 0.65% increase and the S&P 500 increased by 1.06%. The gains came after the US’s announcement of the 3.3% GDP, which is well above the market expectation of 2.0%. Meanwhile, the continued moderation in inflation has created market optimism that the Federal Reserve might start decreasing rates, in order to transit the current rates to a more neutral level.
• The STOXX Europe 600 Index closed with a 3.11% increase. In line with the market expectations, the European Central Bank kept borrowing costs unchanged for the third session. However, the officials emphasized that the policy decisions will be guided by incoming economic and financial data.
• The CSI300 Index saw a climb of 1.96%. The People’s Bank of China announced it would cut its reserve ratio requirement by 50 basis points for most banks, marking the first cut of the banks’ required reserves for the year. Meanwhile, the central bank will also lower the interest rate by 25 basis points to decrease the cost of refinancing for the small businesses and rural sector in China.

CHART OF THE WEEK

The Valuation Tango: US and China Hit New Extremes

In the unforgiving world of China's stock markets, things have taken a wild turn, pushing their valuation gap with their American counterparts to levels that defy financial gravity.

Picture this: The price-to-earnings ratio of the Hang Seng Index has fallen below the price-to-book ratio of the Nasdaq. Now, if this seems a little strange to you, you're not alone.

These two valuation metrics usually keep a safe distance and have no reason to get closer. The recent market atmosphere in Hong Kong equities has momentarily shattered the traditional "laws" of market physics, leaving analysts to ponder and reassess the rules of the game.

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