Red Dragon breaths fire as China's sweeping supportive measures

EU Mid-Market Update: Red Dragon breaths fire as China's sweeping supportive measures finally rewards patient investors with best rally since 2020.

Notes/observations

- China unveiled broad stimulus for its most impactful reform in years: Shanghai Composite +4.1% (best session since July 2020). Positive sentiment for China equities is buoying global stocks as measures cover wide variety of sectors in China, including RRR to be cut by 50bps ‘soon’ with 25bps in year-end pipeline, cut to 7-day Reverse Repo of 20bps, cut MLF by 30bps and LPR by 20-25bps. China also considering ‘stock stabilization fund’, a new monetary policy tool for equity markets and at least CNY500B of liquidity to support equities. Existing mortgages to be cut to be similar to new homes. Other measures were announced. Some analysts see China Ministry of Finance and NDRC to follow up with fiscal stimulus measures in coming weeks.

- German IFO decline reinforced that economy is in a recession with no quick rebound in near term. Follows very weak flash PMI for Germany yesterday. German remains as ‘sick man of Europe’ weighing down the bloc.

- Crude oil moves higher from both China stimulus impact on demand, and Middle East conflict worries on supply as conflict grows. Israeli strikes killed ~500 in Lebanon, the heaviest daily death toll in Lebanon since 1975-90 Civil War.

- Shares of shipping giant Maersk are rising after it announced Port Disruption Surcharge for all cargo moving to and from the U.S. East Coast and Gulf Coast terminals from Oct 21st, as risk of the port strike as soon as from next week looms.

- Asia closed higher with Shanghai outperforming +4.1%. EU indices are +0.2-1.6%. US futures are +0.2-0.4%. Gold 0.0%, DXY -0.1%; Commodity: Brent +2.1%, WTI +2.4%; Crypto: BTC +0.5%, ETH +0.4%.

Asia

- China announcing stimulus measures (or panic???) to assure achievement of its 5% growth target.

- China PBoC to cut the Broad Reserve Requirement Ratio ((RRR) by 50bps "soon’ with up to another 50bps by end-2024.

- China PBOC to cut 7-day Reverse Repo by 20bps to 1.50%; cut MLF between 20-30bps.

- PBoC to set up a swap facility allowing securities firms, funds and insurance companies to tap liquidity from PBOC to buy stocks.

- PBOC will also lower the rates for existing mortgages and cut the down payment ratio on second homes to 15% from 25%. Deposit rate to be lowered to "neutralize" the impact on bank margins.

- RBA left Cash Rate Target unchanged at 4.35% (as expected).

- South Korea Aug PPI Y/Y: 1.6% v 2.6% prior.

- South Korea Aug Retail Sales Y/Y: 9.2% v 6.3% prior.

- Japan Sept Preliminary Manufacturing PMI: 49.6 v 49.8 prior (3rd straight contraction); Services PMI: 53.9 v 53.7 prior (3rd straight expansion).

Global conflict/tensions

- Senior US Sate Dept official: US working hard in recent days to find diplomatic solution to spike in fighting between Israel and Hezbollah. Did not believe a ground invasion of Lebanon was going to contribute to reducing regional tensions.

- US to send troops to help evacuate citizens from Lebanon.

-Ukraine Pres Zelenskiy sees Ukraine war is 'closer to the end, closer to the peace than we think'.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +0.64% at 519.60, FTSE +0.28% at 8,283.10, DAX +0.93% at 19,003.75, CAC-40 +1.45% at 7,616.70, IBEX-35 +0.20% at 11,821.11, FTSE MIB +0.68% at 33,908.00, SMI +0.66% at 12,043.80, S&P 500 Futures +0.24%].

Market Focal Points/Key Themes: European indices open higher across the board and remained upbeat through the early part of the session; South Africa closed for holiday; among sectors leading the way higher are consumer discretionary and materials; sectors still stuck in the red include utilities and telecom; luxury subsector supported following announcement of economic stimulus in China; Capital & Regional accepts NewRiver’s improved takeover offer; EU Commission clears Swisscom’s acquisition of Vodafone Italia; earnings expected in the upcoming US session include AutoZone and KB Homes.

Equities

- Consumer discretionary: LVMH [MC.FR] +3.5% (broad China stimulus measures), TUI [TUI1.DE] +2.5% (trading update with promising commentary on winter season), Deutsche Post / DHL [DPW.DE] +2.5% (targets 50% rev growth by 2030 - CMD), Card Factory [CARD.UK] -17.5% (earnings).

- Energy: BP [BP.UK] +0.5% (Kepler cuts to hold).

- Financials: UBS [UBSG.CH] +3.5% (CEO comments).

- Industrials: Maersk [MARSKB.DK] +3.5% (implementing a local Port Disruption Surcharge for all cargo moving to and from the U.S. East Coast and Gulf Coast terminals, effective October 21st), Smiths Group [SMIN.UK] -6.5% (FY results and two NA acquisitions).

-Materials: Anglo American [AAL.UK] +6.5% (broad China stimulus measures).

Speakers

- BOE Gov Bailey reiterated stance that key rate was on gradual path downward.

- ECB's Muller (Estonia) stated that was reasonable to expect more cuts if outlook held.

- German IFO Economists stated that the German economy was coming under increasing pressure and could contract in 2024.

- BOJ Gov Ueda reiterated stance that would raise rates if economic outlook was realized; Desirable to have rate around neutral if prices around 2%.

- RBA Gov Bullock post-rate decision press conference noted that recent data had not materially impacted the policy outlook. Reiterated view that rates to remain on hold for the time being and did not explicitly consider a rate rise this time nor saw rate cuts in near-term.

Currencies/fixed income

- USD was softening a bit as the EU session wore on. Earlier the China PBoC announced plans to roll out a series of measures to boost the economic recovery, including the intention to cut the reserve requirement ratio (RRR) by 50bps. Greenback appeared to be initially receive some support from escalating geopolitical tensions between Israel and the Lebanese militant group – Hezbollah via safe-haven demand.

- EUR/USD holding well above the 1.11 level in lackluster trade. Markets focus on upcoming ECB member Nagel after a string of disappointing EU data. German IFO survey missed consensus. ECB Oct rate cut option remains in pay.

- USD/JPY back above 144 level aided by a slight rebound in US yields. BOJ Gov Ueda noted that the unwinding of speculative JPY (yen) positions had likely run its course. Markets also believe BOJ would likely delay the next round of rate hikes.

- AUD/USD moved off its best level after RBA Gov Bullock noted that it did not explicitly discuss rate rise at its Sept meeting. .

Economic data

- (FI) Finland Aug PPI M/M: -0.8% v -0.4% prior; Y/Y: -2.3% v 0.2% prior.

- (FI) Finland Aug Unemployment Rate: 7.5% v 7.9% prior.

- (CZ) Czech Sept Consumer Confidence: 97.9 v 97.5e; Business Confidence: 96.8 v 93.2e; Composite Confidence: 97.0 v 93.9e.

- (TR) Turkey Sept Real Sector (Manufacturing) Confidence: 99.2 v 98.0 prior; Real Sector Confidence (unadj): 98.8 v 98.5 prior.

- (TR) Turkey Sept Capacity Utilization: 74.9% v 75.4% prior.

- (DE) Germany Sept IFO Business Climate: 85.4 v 86.0e; Current Assessment Survey: 84.4 v 86.1e; Expectations Survey: 86.3 v 86.5e.

- (PL) Poland Aug Unemployment Rate: 5.0% v 5.0%e.

- (TR) Turkey Aug Foreign Tourist Arrivals Y/Y: 2.5% v 2.6% prior.

- (TW) Taiwan Aug Export Orders Y/Y: 9.1% v 8.2%e.

Fixed income issuance

- (SI) Slovenia opened its book to sell EUR-denominated 3% Mar 2034 bond; guidance seen +62bps to mid-sw.

- (ES) Spain Debt Agency (Tesoro) opened its book to sell Nov 2036 inflation-linked bonds (SPGBei) via syndicate; guidance seen +25bps to SPGB.

- (UK) DMO sold £1.5B in 0.75% Nov 2033 inflation-linked Gilts; Real Yield: 0.486% v 0.462% prior; bid-to-cover: 3.17x v 2.94x prior.

- (AT) Austria Debt Agency (AFFA) sold total €1.827B vs. €2.0B indicated in 3-month and 6-month Bills.

- (ID) Indonesia sold total IDR10.0T vs. IDR8.0T target in Islamic bills and bonds (sukuk).

Looking ahead

- (IL) Israel Aug Leading ‘S’ Indicator M/M: No est v 0.0% prior.

- (NG) Nigeria Central Bank (CBN) Interest Rate Decision: Expected to leave Key Rate unchanged at 26.75%.

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:25 (CH) Switzerland to sell 6-month Bills.

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-Month Bills.

- 05:30 (DE) Germany to sell €4.5B in 2.70% Sept 2026 Schatz.

- 05:30 (ZA) South Africa to sell combined ZAR3.75B in 2033, 2038 and 2040 bonds.

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO) (prior €1.935B with 29 bids recd).

- 07:00 (BR) Brazil Central Bank (BCB) Sept Minutes.

- 07:00 (BR) Brazil Sept FGV Consumer Confidence: No est v 93.2 prior.

- 08:00 (HU) Hungary Central Bank (MNB) Interest Rate Decision: Expected to cut Base Rate by 25bps to 6.50%.

- 08:00 (CL) Chile Aug PPI M/M: No est v 0.2% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:00 (RU) Russia announcement on upcoming OFZ bond issuance (held on Wed).

- 08:30 (US) Sept Philadelphia Fed Non-Manufacturing Activity: -9.3e v -25.1 prior.

- 08:55 (US) Weekly Redbook LFL Sales data.

- 09:00 (BE) Belgium Sept Business Confidence: -12.4e v -12.6 prior.

- 09:00 (US) July FHFA House Price Index M/M: +0.2%e v -0.1% prior.

- 09:00 (US) July S&P Corelogic House Price Index (20-City) M/M: 0.40%e v 0.42% prior; Y/Y: 5.90%e v 6.47% prior; House Price Index (overall) Y/Y: No est v 5.42% prior.

- 10:00 (US) Sept Consumer Confidence: 104.0e v 103.3 prior.

- 10:00 (US) Sept Richmond Fed Manufacturing Index: -12e v -19 prior. (IT) Italy Debt Agency (Tesoro) to sell €.

- 12:00 (DE) ECB’s Nagel (Germany).

- 13:00 (US) Treasury to sell 2-Year Notes.

- 13:10 (CA) Bank of Canada (BOC) Macklem.

- 16:30 (US) Weekly API Oil Inventories.

- 17:00 (KR) South Korea Sept Consumer Confidence: No est v 100.8 prior.

- 19:50 (JP) Japan Aug PPI Services Y/Y: 2.6%e v 2.8% prior.

- 21:20 (CN) China PBoC 1-year Medium-Term Lending Facility (MLLF) Setting: Expected to leave rate unchanged at 2.30%.

- 21:30 (AU) Australia Aug CPI Y/Y: 2.7%e v 3.5% prior; Trimmed Mean CPI Y/Y: No est v 3.8% prior.