Weekly Market Update - 1st October 2024

China stimulus lifts global markets

Since it was opened up and reformed in the late 1970s, China’s economy has grown at an average rate of 9% a year.

Not this year. Facing strong disinflationary pressures, a severe property downturn and frail consumer confidence, China risks missing its own annual growth target of around 5%. So, as the week began, markets reacted enthusiastically to the People’s Bank of China unveiling a major package of aggressive measures designed to stimulate the economy.

These measures included plans to cut the amount of cash banks must hold in reserve, freeing up around one trillion yuan ($142 billion) for new lending, as well as efforts to boost the ailing property market by cutting borrowing costs for existing mortgages and lowering the minimum down payments on all homes to 15%.

Global stocks rose to a record high on Tuesday, while major US indices also hit record closing highs as investors cheered the news.

But analysts believe that a lack of liquidity isn’t the main problem and only policies putting money into consumers’ pockets will boost demand. Markets lost momentum in the middle of the week as those doubts resurfaced but regained strength on Thursday when Chinese leaders pledged to deploy “necessary fiscal spending” to meet the country’s growth target, raising expectations for further stimulus. Leading indices in the US and Europe registered all-time closing highs, and Asian stocks finished the week at two-and-a-half year highs, with Chinese shares having their best week since 2008 after jumping nearly 16%.

“Even at the lower end of estimates, China’s GDP is still forecast to grow at 4.6% this year, so it’s hardly falling off a cliff,” points out Martin Hennecke, Head of Asia Investment Advisory at St. James's Place. “The Fed’s action has made it easier for China to take these steps, and with its leadership in advanced manufacturing, green energy and transport, the fundamentals remain in place. These factors, combined with low valuations in both absolute and relative terms, continue to make a strong case for Chinese equities within a well-diversified portfolio.”

Concern about the state of the job market was cited as the reason for a surprising fall in US consumer confidence in September, marking its biggest monthly decline in over three years. Data also showed that consumers’ 12-month inflation expectations rose in August. Although analysts were reluctant to put too much weight on short-term data, sagging consumer confidence appeared to support the case for another hefty interest rate cut at the Federal Reserve’s next meeting in November.

However, the end of the week brought news that dampened those hopes. US weekly jobless claims dropped to a four-month low, suggesting the labour market remains relatively healthy, and corporate profits for the second quarter were revised upwards; growth which should help underpin business investment and the labour market.

Expectations of a smaller quarter-point cut were further cemented on Friday with news that US consumer spending increased in August, albeit slightly less than expected, while the personal consumption expenditures index (the Fed’s preferred inflation gauge) registered its smallest year-on-year gain since February 2021.

Turning to the EU, expectations for more interest rate cuts from the European Central Bank (ECB) were raised by disappointing business activity data. The eurozone’s dominant services industry flatlined in September, while manufacturing activity continued to decline. Germany saw its slowdown deepen and France contracted again after a boost in August, suggesting eurozone optimism was extinguished at the same time as the Olympic flame.

After contracting in the second quarter, the sharp fall in German business activity raises the prospect of Europe’s largest economy tipping into recession in the third quarter. German businesses are shedding staff at a rate not seen in over 15 years outside of the pandemic.

Elsewhere in Europe, central banks in Sweden and Switzerland cut borrowing costs by a quarter point as inflationary pressures continued to ease. The deteriorating economic outlook in the wider region has boosted bets on a further ECB rate cut in October.

There was better news for the UK government as the Organisation for Economic Co-operation and Development (OECD) upgraded its estimate of UK economic growth for this year and 2025. The think tank now expects the UK economy to grow by 1.1% in 2024, up from its May forecast of just 0.4%, which would be the joint-second highest rate amongst the wealthy G7 countries. That said, this morning, the Office for Budget Responsibility revised down the UK GDP growth between April and June from 0.6% to 0.5%.