China back on the brink of deflation

• European markets lower, as gas price surge raises inflation risk.

• Big banks see earnings season pick up pace.

Inflation has been a hot topic this week, with US PPI and CPI both coming in hotter-than-expected thanks in part to the recent energy price rebound. China continued the inflation theme, with CPI falling back on the cusp of deflation once again following a September annual reading of 0%. While we saw some improvement in the Chinese trade balance data on improved imports and exports, the sharp declines for the Hang Seng highlight a lack of confidence in the Chinese economic outlook. Bulls will hope that Chinese plans for a stock market stabilisation fund will help alleviate some of the pain for a market that has been one of the biggest underperformers over the course of the past year.

European indices are losing ground as we head into the weekend, with fears around a surge in natural gas providing a worrying uplift for inflation expectations. Events in Israel and Gaza have understandably raised concerns over relations and trade between Middle East and Western nations, with rumours that Qatar will limit its LNG exports only intensifying those concerns. While the September rally for crude had some concerned, a repeat of the European gas price spike seen last winter would be hugely detrimental to disinflation hopes.

US earnings season gets going in a meaningful way today, with a handful of big banks reporting their third quarter numbers. Questions around the underlying health of the economy come into focus once again, with bad loan write-downs expected to rise into the highest level since mid-2020. There is plenty of uncertainty throughout the sector, as the obvious benefit of rising interest rates also bring questions around mortgage affordability, corporate banking demand, and trading conditions for investment banks.