Equities extend rally on China stimulus, Fed cut bets

Let’s continue to count. 41. The S&P500 celebrated its 41st record high yesterday. Even though yesterday’s session began on a softish note – after the data showed the biggest drop in the US consumer sentiment since August 2021, another one revealing that Jensen Huang is done selling his Nvidia shares outshined the doom and gloom of the consumer sentiment and sent Nvidia 4% higher and the S&P500 to 5735. Nasdaq 100 added on to its gains, the Dow Jones traded at an ATH even though Visa tumbled 5.5% after being sued by the DoJ for illegally monopolizing the debit card market. Small caps eked out small gains. In summary, investors sentiment is far better than your average consumer’s, and the fact that consumer sentiment is weak contributes to inflating the dovish Federal Reserve (Fed) expectations. Swap markets now price in more than 75bp cut from the Fed for the remainder of this year and activity on Fed funds futures assesses more probability to another 50bp cut in November (58%) than a 25bp cut.

More China boost

The People’s Bank of China (PBoC) cut its repo, RRR and existing mortgage rates earlier this week, and announced a 30bp cut to their MLF rate today. The latter further fueled the Chinese equity rally. The CSI 300 which rallied more than 4% yesterday, added another 2% this morning. The Hang Seng index recorded about the same rally and is now testing the May highs. And wait, Nasdaq’s Golden Dragon China index jumped 9% yesterday in the US. Alibaba advanced nearly 8% while PDD jumped 11% on hope that the latest stimulus measures will bring investors back to China. The problem is, the stimulus measures will take time to show in the economic data. And more worryingly, they won’t do much to fix the country’s deepest issues – they won’t reverse local governments’ heavy debt burden, China’s aging population, and will hardly boost the demand-led growth. As such long-term investors appreciate the efforts but prefer to watch from a distance for now.

This being said, the Chinese stimulus measures help improve mood among global mining companies. BHP for example jumped 3% yesterday and another 3% today in Australia, Rio Tinto and Glencore jumped 4% yesterday and will probably continue their journey to the north today. The commodity friendly Aussie remains bid – somehow retained by the fact that inflation in Australia hit a 3-year low. But the Aussie bulls now set their eyes on the 70 cents level against the US dollar as the next natural target, and the prospects for the FTSE 100 are improving.

Doom and gloom

The EURUSD is testing the 1.12 offers again this morning. But the US dollar’s weakness has more to do with the EURUSD’s gains than the European fundamentals themselves. Germany’s business outlook deteriorated further in September and reinforced fears of possible recession. That, combined to soft PMI figures released earlier this week boost the probability of another European Central Bank (ECB) cut in October. If there is no surprise in the upcoming inflation updates, there will be a strong case for a 25bp cut from the ECB next month. And the latter should limit the euro’s upside potential.

Elsewhere, the USD remains broadly under pressure, the dollar index continues to push toward this year’s lows as investors increase Fed cut bets. The price of an ounce runs from record to record, in the overbought territory, with the rising tensions between Israel and Lebanon giving an additional hand from those who fly to safety.

In this context, crude oil is also better bid. The rising geopolitical tensions and the Chinese stimulus measures strengthen the oil bulls hands, but the $72.85pb level is yet to be cleared to send the price of a barrel into the medium term bullish consolidation zone. Soft global demand prospects and amply supply keep the topside limited.