China follows the Fed, as animal spirits are unleashed

The Chinese authorities managed to surprise the market on Thursday, with a large stimulus plan that exceeded expectations. The PBOC has thrown the kitchen sink at its sluggish economy and unloved equity market. It announced cuts to short-term interest rates and reserve requirements, which are now at their lowest level since 2020. It also eased mortgage rates to the tune of $5.3trn and eased the ability to purchase second homes. In a surprise move, the PBOC also announced $113bn of liquidity support for equities, and Asian indices have surged on Tuesday. The Hang Seng is higher by 3.99%, while the onshore CSI 300 index is up by 4.3%. The sharp rally in Chinese stocks is a sign that investors think today’s measures will have a material impact on Chinese economic growth, which has disappointed expectations for most of this year.

Beijing’s Q4 gift to the markets

The timing of the move by Beijing suggests that they felt more comfortable unleashing the ‘Big stimulus’ after the Fed started its rate-cutting cycle. The question for investors is what does this mean for broader markets? Will the China stimulus trade be the best trade of Q4? The initial reaction has centred on Chinese equities, and today’s stimulus package is designed to boost the domestic economy, hence the blistering rally in Chinese and HK shares on Tuesday. Interestingly, the Chinese yuan has closed at its highest level since 2023 versus the US dollar on Tuesday, in another sign that these measures are not designed to support exporters, but instead to support domestic economic growth. This is also good for global risk sentiment since it suggests that China will not be exporting inflation around the world. Thus, today’s measures will not stop central banks from cutting interest rates.

European stocks open with a bang

This has positive ramifications for global markets. It should be good news for commodity producers, stocks with links to the Chinese and Hong Kong property market, and European companies that sell to the Chinese consumer. This package could help the beleaguered German luxury car sector along with French luxury goods houses. Unsurprisingly, European stocks have warmly welcomed the news from China and are a sea of green this morning. The Eurostoxx 50 is higher by 1.25%, the Cac is up by 1.4% and the Dax is higher by 0.7%. The news from China will give European shares more of a boost than rising expectations of an October rate cut from the ECB!

Hermes, LVMH, Kerring and BMW are leading the gains in Europe. In the UK, the boost to the FTSE 100 is milder, the UK index is higher by 0.46%. However, the impact of China’s stimulus package is still being felt, and the FTSE 100’s materials sector is higher by more than 4%.

Move over OPEC: Beijing gives commodities a boost

Move over Opec, commodity prices are also higher across the board. The price of Brent crude oil is higher by more than 1% on Tuesday and it is trading at $74.80 per barrel. Iron ore, which is used for steel making and is essential for transportation, energy infrastructure and multiple household appliances, is higher by more than 4%. This is why Rio Tinto, Anglo American and Antofagasta are leading the FTSE 100 on Tuesday morning. HSBC is also worth watching. It said over the weekend that it was writing down more than $3bn of Hong Kong commercial property loans. However, today’s stimulus package offers a whole range of incentives and sweeteners for lenders and property developers to boost China’s beleaguered property sector. HSBC’s stock price is higher by 0.6% so far on Tuesday, however, we think that today’s news should be positive for banks with exposure to property in the region, and we may see HSBC sustain gains in the coming weeks.

Chinese stocks: Stimulus plus low valuations could lure foreign investors

The measures to boost China’s equity market come at a good time, since the CSI 300 is looking like good value. It has a P/E ratio of 12.9, and the 12-month forward P/E ratio is less than 11. This could be enough to entice foreign investors and fund managers back into the Chinese equity market, and we may see sustained gains. YTD, the CSI 300 is down by more than 2%, we expect it to play catch up as we move towards Q4.

French luxury houses basking in warm Beijing glow

The stimulus package from Beijing could also transform the fortunes of European equities. The French Cac 40 index is higher by 0.7% so far this year, and it has been weighed down by large losses for some luxury names like Kering, LVMH and L’Oreal. If this stimulus package unleashes the power of the Chinese consumer, then we could see French luxury and consumer goods companies rally into year end. Commodities have also been under pressure in recent months, today’s news could also boost the commodity space in Q4, and we may have reached a nadir for commodity prices.

Not such a bad September

September is seasonally a bad month for risk assets, but not so September 2024. Month to date, US indices are higher, and although European indices are lower so far this month, a boost from China that helps the Eurostoxx, the Cac and the FTSE 100 to rally this week could turnaround their fortunes.