Policymakers chase the clouds away

China’s stimulus adds to the market’s optimism 

Last week, China unveiled a surprise package of stimulus measures to boost its economy and stock market. The People’s Bank of China (PBoC) cut interest rates, lowered banks’ reserve requirement ratios and relaxed mortgage policies. It also announced it would support the stock market by helping firms buy back shares and allowing them to use their own shares and other financial instruments as collateral to borrow liquid assets from the PBoC. In addition, the Politburo, the highest political body of the Central Committee of the Chinese Communist Party, vowed to issue new bonds to stimulate domestic consumption and stabilise critical sectors such as the property market so that economic growth meets the 5% target this year.

The combined announcement of monetary and fiscal measures marks a significant change in Beijing’s approach. During the three-year-long property bust and post-pandemic slump, Beijing only worked in small monetary easing increments to support growth, which led to a loss of domestic and foreign confidence.

This time around, these measures have triggered a round of optimism on Chinese assets. The Shanghai Shenzhen CSI 300 index skyrocketed by around 15%, as did the Hong Kong-listed indices, the HSI (+13%) and HSCEI (+14%). In the currency space, the Chinese yuan appreciated 0.6%. The rebound in Chinese assets lifted regional equity markets, too, from India to Japan. Overall, the MSCI Emerging Market equity index ended the week 5% higher. Commodities also gained. Industrial metals rose by more than 5%, and gold continued to rise, too, supported by strong demand and prospects of lower interest rates. 

US interest rate cuts and a weaker US dollar support emerging markets

The weakness of the US dollar, which has been one of our key views of 2024, is playing out and is likely to continue, following the start of the US Federal Reserve’s (Fed) interest rate-cutting cycle two weeks ago. For the emerging market economies, this is good news as emerging market central banks can now support growth without weakening their currencies versus the US dollar. We saw this as early as last week in China, for instance. To put this into context, the US dollar index (DXY) is down 0.5% in 2024 (more notably, it’s 5.5% down from the highs of April), while the MSCI Emerging Market Currency index is up 2.6%.

We think the combination of the new rounds of stimulus in China and a weaker dollar will likely be a renewed tailwind for emerging market assets. Despite owning slightly more equities than usual, we currently hold a neutral allocation to emerging market assets, both in equities and bonds. We are reviewing these positions. That said, for now, the lack of details on the Chinese fiscal front still calls for some caution. In addition, the US dollar is facing a strong level of support that’s been holding since late 2022. A break below 100 for the DXY could point to more weakness, opening the door to a more meaningful rise in emerging market assets. So far in 2024, developed market equities (+17%) have outperformed their emerging market peers (+13%).

What we’re watching this week

This week, we’ll watch the ISM surveys on both manufacturing (Tuesday) and services (Thursday) activity in the US to gauge the confidence of businesses. With inflation seemingly under control, the Fed made clear it’s now looking after the labour market. Markets will be closely watching private-sector and nonfarm payroll data (Wednesday and Friday, respectively), as well as job openings (Tuesday). Worse-than-expected labour market data could revive fears that the economy is slowing more than expected. If they come in better than expected, the market could reduce its expectations of interest rate cuts. However, given that it currently expects more cuts than the Fed is projecting, it could just be an alignment of expectations, which wouldn’t be a bad thing.

In Europe, the purchasing managers’ indices for both manufacturing and services activity came in weak last week. Price pressures also eased. This week (Tuesday), inflation in the eurozone for September is expected to fall to the 2% target. We think this increases the odds that the European Central Bank (ECB) will cut rates at its October meeting. More ECB cuts should support European government bonds and investment grade (high quality) corporate bonds, as well as European equities – we hold an overweight position in all these markets.