China has just dropped a $140 billion economic bombshell to jolt its sluggish economy back to life. This massive stimulus package, featuring rate cuts and a hefty liquidity injection, has set markets abuzz. While it is clear Beijing is rolling up its sleeves to combat deflation and a troubled property market, the big question is: will this shot of adrenaline be enough to jumpstart the world’s second-largest economy?
Key themes for the week:
- China unveils hefty stimulus package
- US produces strong second-quarter GDP
- Bulls in the driver’s seat in equity markets
- Gold remains on the up and up
- Pound at its strongest level since 2022
What’s behind China’s stimulus blitz?
China’s economy has been limping lately, struggling with sluggish growth, a gloomy property sector, and the dreaded “D” word—deflation. Traditional pillars like manufacturing and exports are losing steam, while consumer confidence has been as elusive as a mirage in the Gobi Desert. Enter the new stimulus package: a lifeline to pump liquidity into the financial markets and breathe life into the ailing economy.
At the heart of this move is a C¥800-billion ($114 billion) facility to revive the stock market. Coupled with significant interest rate cuts, it is a clear message from Beijing: they are pulling out the stops to turn things around. It is the economic equivalent of bringing in heavy artillery when the usual tactics are just not cutting it anymore.
Ripple effects on emerging markets
So, what does this mean for emerging markets? Well, China’s economic pulse has a direct impact on these regions, particularly those dependent on exporting commodities. A rebound in Chinese demand could send commodity prices higher, offering a much-needed boost to economies like Brazil, South Africa, and Australia.
What is in it for China?
This stimulus package is more than just a quick fix; it is a bold attempt to revive growth to meet the government’s target of around 5% for the year. The measures include slashing interest rates, lowering bank reserve requirements, and even offering a few lifelines for the battered property market. But here is the rub: while these moves can flood the market with cash, they do not necessarily translate into higher consumer spending or investment.
The property sector, a big chunk of China’s economy, remains a weak link. Even with lower mortgage rates and down payment requirements, many potential buyers are holding off. They are wary of falling prices and economic uncertainty. It is like throwing water on a plant that is already wilting—if the roots are not strong, it is not going to flourish.
Asian markets rally, but for how long?
The initial reaction to the stimulus was nothing short of euphoric. The CSI 300 Index, a benchmark of blue-chip Chinese stocks, jumped more than 4%, erasing its losses for the year and clocking its best weekly performance since 2022. The Chinese yuan also surged to a 16-month high against the United States (US) dollar, reflecting renewed optimism.
This upbeat sentiment spread across the region, lifting indices from Hong Kong to Tokyo. Even European markets caught the tailwind, with the Stoxx 600 edging closer to its all-time high. But before we pop the champagne, let us remember that markets can be fickle. The rally is primarily driven by expectations of further Chinese policy easing and hopes for more comprehensive fiscal support. If these do not materialise, the party could end as quickly as it started.
Is this enough to fix China’s problems?
Here’s where things get interesting. While the stimulus package is impressive in size and scope, it does not tackle some of the Chinese economy’s deeper issues. Consumer demand remains weak, and confidence in the property market is shaky at best. Without more direct support for households—think cash transfers or tax breaks—spurring long-term growth could be a tall order.
Many analysts believe China needs to go beyond monetary measures and introduce robust fiscal policies to stabilise the economy. This could involve increased government spending on infrastructure or targeted programs to boost consumer spending. Until then, the current stimulus might only be a temporary boost, leaving the underlying problems unresolved.
A global balancing act
China’s economic manoeuvres are unfolding against a backdrop of global uncertainty. With the US Federal Reserve (Fed) easing rates, Beijing has some room to manoeuvre without putting too much pressure on the yuan. However, global investors are still wary, having seen similar moves in the past fail to deliver the expected results.
China’s latest policy gambit is a bold statement in a world where every central bank is trying to outmanoeuvre the next. It shows they are willing to do whatever it takes to keep growth on track. However, whether this stimulus is the start of a genuine recovery or just another blip on the radar remains to be seen.
China’s $140 billion stimulus is a powerful play aimed at reversing its economic woes and boosting market sentiment. While the initial impact has been positive, especially in Asian financial markets, the true test will be whether these measures can address the economy’s deeper, more systemic challenges. For now, it is a high-stakes game, and the world is watching closely to see if this bold move will pay off or if more will be needed to keep the dragon roaring.
MARKET PULSE
Tug of war in bond markets
The 10-year US Treasury yield has been holding firm above the 3.8% mark, its highest level in over three weeks. Why? Well, it seems robust economic data is playing cat and mouse with inflation expectations, keeping the Fed’s ambitious rate-cutting plans on a tight leash. A solid 3% gross domestic product (GDP) growth in the second quarter, lower-than-expected jobless claims, and steady durable goods orders are all painting a picture of a resilient US economy. This, in turn, is giving the Fed some room to keep rates higher for longer, especially if inflation decides to be stubborn. And while Fed Governor, Michelle Bowman opted for a softer 25-basis point cut this month, the 10-year yield remains on an upward trajectory, bouncing back from its 16-month low of 3.6%.
Across the pond, the United Kingdom’s (UK’s) 10-year Gilt yield topped 3.9% after the Bank of England (BoE) chose to hit the pause button, keeping rates steady at 5%. Despite UK annual inflation holding at 2.2%, core inflation has crept up to 3.6%, which is above expectations. Traders are now dialling back their rate cut bets, with 42 basis points expected by year-end, down from 52 basis points previously. The BoE is treading carefully, much like a tightrope walker trying to balance economic stability and inflation control. Meanwhile, the Fed’s hefty 50-basis point cut, along with its dovish outlook, are adding a bit of spice to the global bond market stew.
In South Africa, the R2030 government bond yield is hovering around 8.85%, its lowest level since August 2021. This follows a one-two punch of rate cuts from both the South African Reserve Bank (SARB) and the Fed. With the political winds changing direction and years of debilitating power outages seemingly at an end, there is a renewed sense of optimism in the country. South African bonds, offering some of the most attractive yields around, are catching the eye of investors hunting for value. The government’s decision to open up the electricity, freight rail, and ports sectors to private players could just be the spark needed to reignite growth in Africa’s most industrialised economy.
Bulls take the reins in equity markets
On Wall Street, the S&P 500 hit a new record, up 0.6%. The Nasdaq 100 futures surged 1.3%, thanks to a stellar performance from Micron Technology. The chipmaker’s stock rocketed 16% after posting better-than-expected earnings and a solid outlook. It was not just Micron basking in the limelight; semiconductor stocks across the board, including Applied Materials and Lam Research, jumped around 6%. Lower US jobless claims and a sturdy 3% GDP growth in the second quarter are providing a sturdy floor for stocks, keeping the bears at bay—for now.
The UK’s FTSE 100 bounced back 0.5% on Thursday, shaking off the previous session’s loss, buoyed by a rally in mining stocks. China’s commitment to meeting its 5% growth target and potential capital injections into major state banks has sent a wave of optimism through the market. Mining stocks shot up 4% as copper prices climbed, while oil and gas stocks lagged, weighed down by falling crude prices. Watch out for luxury watch retailer, Watches of Switzerland, which climbed over 4.5% after a nod from Deutsche Bank, and luxury goods brand, Burberry, is up 6.5% on hopes that China’s recovery could revive luxury demand.
Germany’s DAX soared 1.2% on Thursday, breaking into record territory. Investors are cheering China’s stimulus package and the hints of more support to come, including a potential capital injection of up to C¥1 trillion into state banks. Tech stocks got a boost from Micron’s strong outlook, with German software company, SAP, rebounding and auto giants, like Porsche, and financials, such as Commerzbank, leading the charge. While it is a tech-led rally, the optimism is palpable across most sectors.
South Africa’s JSE Index extended its winning streak into a fifth consecutive day, hitting fresh record highs around 87,000. Global markets were buoyed by China’s aggressive stimulus measures, and the easing cycle initiated by both the Fed and SARB only added fuel to the fire. Technology, industrial metals, and personal goods were the stars of the JSE’s show.
All that glitters is gold
Gold is holding steady near $2,660/ounce, flirting with record levels as markets anticipate the Fed’s next move. Despite calls for caution following the 50-basis point rate cut, traders are betting on another 50-basis point reduction in November, giving the precious metal a boost. Geopolitical tensions and a potential escalation in the Middle East are also adding to gold’s allure as a safe-haven asset.
Brent crude slipped further towards $71/barrel, extending its 2% slide from the previous session. News that Saudi Arabia is dropping its unofficial price target and ramping up production has weighed heavily on prices. Libya’s factions have also struck a deal to appoint a central bank governor, potentially restoring exports and adding to the supply glut. Still, Middle East tensions keep a floor under prices, with the risk of disruptions looming large.
Sterling steals the show
The US Dollar Index steadied around 100.7 as traders digested a mixed bag of economic data. With higher-than-expected second quarter US GDP growth, jobless claims at a four-month low, and durable goods orders holding firm – surprising to the upside, the odds of another 50-basis point cut in November have dipped slightly, but they’re still higher than last week. The dollar’s soft spot? Its broad-based weakness against the British pound and Australian dollar.
The euro climbed above $1.11/€, thanks to a mix of positive signals from China and dovish whispers from the Fed. However, the eurozone’s struggles are far from over. Business confidence in Germany is sliding, and Purchasing Managers’ Index data paints a bleak picture of the zone’s economic health. The European Central Bank’s September rate cut might not be its last, as weak growth and low inflation are keeping the pressure on.
The pound surged to its highest level since March 2022, topping $1.33/£ after the BoE held UK rates steady. UK core inflation’s slight uptick has traders adjusting their rate cut bets, but for now, sterling is riding high on the dollar’s weakness and the BoE’s cautious optimism.
The rand hit its strongest level since January 2023, riding the wave of a weaker dollar and the surprise stimulus package from China, which bolstered emerging markets. With local inflation expected to remain comfortably below target, and growth projections looking up, the rand could be in for sustained strength.
Key Indicators:
USD/ZAR: 17.22
EUR/ZAR: 19.22
GBP/ZAR: 23.04
GOLD: $2,665.85
BRENT CRUDE: $70.88
Sources: Bloomberg, Reuters, Trading Economics and Investing.com.
Written by: Citadel Advisory Partner and Citadel Global Director, Bianca Botes.