The Overnight Report: China Throws A Party

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Good morning.

News that China’s policymakers are looking to announce further support measures overnight supported risk sentiment across the globe. In addition, a decline in US initial jobless claims data pointed to a still resilient US labour market, which supports the market’s Risk On sentiment.

Equities lifted led by gains in sectors exposed to China, while bond yields rose. The yield on the US 10y bond rose 1.3bp to 3.79%. Gold hit a new record high and is now at US$2,672.4/oz.

Copper rallied back above US$10,000/tonne and iron ore broke through US$100/tonne. A weakening USD assisted with the gains.

Oil did not join the China party, down another -2% as the Saudis seem to have abandoned their US$100/bbl price target.

The S&P500 closed up 0.4% and the NASDAQ 0.6%. In Europe, the Eurostoxx 600 finished 1.25% higher and the mega-cap Eurostoxx 50 advanced 2.4%.

As per always, buoyant conditions for risk assets elicit opposing views.

The assessment from Rania Gule Senior Market Analyst at XS.com:

The Dow Jones prices are stabilising slightly below their all-time high of $42,124.50 during Thursday’s trading. I believe the Dow Jones and U.S. stock markets are driven by a combination of factors, including economic indicators, geopolitical developments, and monetary policies. Recently, we’ve witnessed a surge in U.S. stock futures, including the Dow Jones Industrial Average, due to positive earnings from Micron and China’s pledges to boost economic stimulus. These developments have fueled optimism in the markets, especially in the technology sector, which is seeing strong demand for AI chips.

Investor optimism regarding China’s stimulus and expectations of increased financial support is reinforcing a positive sentiment in U.S. markets. However, this optimism may be fraught with risks. From my perspective, it seems that technical indicators suggest that U.S. markets may soon enter a correction phase. The Dow Jones has seen a slight pullback after reaching record levels, which could indicate that prices are approaching overbought territory.

The recent market movements have not been limited to the tech sector but have also affected U.S. Treasury bonds. Yields have risen significantly, which negatively impacted stock performance, particularly major indices like the Dow Jones. These rising bond yields, in my opinion, suggest that investors are beginning to view the U.S. economic situation with caution. Despite the Federal Reserve cutting interest rates by 50 basis points, the expected impact on American consumer confidence has not materialised, as it has dropped to its lowest levels in three years. This contrast between market responses and economic reality raises many questions about the sustainability of this positive momentum.

In my view, while stock markets seem driven by expectations of further rate cuts, there remains a cautious anticipation among investors, especially awaiting remarks from Federal Reserve Chairman Jerome Powell. I believe these remarks could be pivotal in determining the market’s next direction. If Powell hints at further monetary easing, optimism in the markets could persist for a longer period. However, if his statements are less optimistic than traders expect, it could lead to a sharp price correction.

As for economic data, GDP readings and inflation-related metrics like the Personal Consumption Expenditures (PCE) index will be key factors in determining market movements in the coming period. U.S. GDP is expected to remain stable at 3%, but if economic data surpass expectations, we could see rising yields and a decline in stocks due to growing inflation concerns.

Additionally, the U.S. real estate market is suffering from a decline in new home sales, reflecting a slowdown in demand despite interest rate cuts. This decline highlights the challenges facing the U.S. economy, where there remains a gap between optimism in the stock markets and the reality of economic performance.

In my opinion, the biggest challenge investors face now is how to navigate this disparity between excessive optimism in the stock markets and economic data pointing to a potential slowdown. From a technical analysis perspective, the Dow Jones is showing signs that markets may be entering a correction phase, particularly with rising yields and anticipated inflationary pressures.

In conclusion, we cannot overlook the heavy reliance of the markets on central bank monetary policies. Expectations of rate cuts are supporting stock investments, but if economic data come in stronger than expected or if the Federal Reserve signals a shift in policy, the markets could see a significant downturn. In my view, the Dow Jones has entered a danger zone where any economic shock or shift in Federal Reserve policies could push the markets into a sharp correction.

Therefore, caution seems to be the best approach for investors at this stage, as they face a mix of optimism and warnings about the economic situation. The markets may witness a corrective move in the upcoming period, but much will depend on forthcoming economic data and Jerome Powell’s statements.

Assessment by Quasar Elizundia, Expert Research Strategist, Pepperstone:

The U.S. stock market is experiencing another key day, with the S&P 500 reaching a new record, advancing approximately 0.70% to stand at 5760 points. This momentum has been mirrored by other indices, such as the Nasdaq100, which is up around 1.1% and trading at around 20200 points, reflecting a risk-taking environment globally, where European and Asian indices also posted gains during the day.

This performance is supported by U.S. economic data that exceeded expectations. In particular, durable goods orders remained unchanged, defying the expected correction, and jobless claims fell to their lowest level in several months. Additionally, second-quarter GDP growth was confirmed at a solid 3%, contributing to market optimism and supporting the record levels reached by the S&P500.

Key Factors Behind the Record

The U.S. economic context has recently been favorable for the equity market. Weekly jobless claims unexpectedly fell to 218,000, marking a new four-month low. This figure, following the aggressive start of monetary policy normalization by the Fed, alongside second-quarter GDP confirmed at 3%, has strengthened the narrative of an economy that, while facing some challenges, continues to show resilience. These indicators have generated a positive market reaction, easing concerns about a more pronounced slowdown in economic growth.

Additionally, the Chinese Central Bank has also played a significant role by implementing a series of aggressive stimulus measures, the largest since the pandemic, in an effort to revitalize its economy amid deflationary pressures. The measures announced earlier this week included cuts in interest rates and reserve requirements, which injected confidence into global markets. Although these measures have been criticized by some analysts, the general sentiment has been positive, contributing to risk appetite for assets such as stocks.

Expectations and Risks Ahead

Despite the current optimism, there are risk factors that could affect the trajectory of markets in the coming weeks. One of the key events to watch will be the release of September’s U.S. labor data, with the nonfarm payroll (NFP) report scheduled for next week. The Federal Reserve (Fed) has focused its attention mainly on the labor market, and the evolution of these figures will be crucial in determining the next step in its monetary policy.

The Fed’s focus on employment data could bring back volatility factors soon, as any significant deviation from expectations could influence monetary policy decisions. Additionally, the start of the fourth quarter will mark the beginning of a new earnings season, a key period to assess whether the current record-high stock valuations are justified by corporate results.

Expectations for corporate earnings growth have diminished, with projections pointing to 5% earnings per share (EPS) growth for S&P 500 companies in the third quarter of 2024, down from 12% in the second quarter. This adjustment reflects a moderation in expectations as companies continue to navigate an environment of higher operating costs and still-elevated interest rates.

Conclusion

The new record for the S&P500 reflects an economic and market environment that, while facing challenges, remains favorable for risk assets. Support from positive economic data and external stimuli, such as those from China, has been key to this rise. However, upcoming labor data and the earnings season will be crucial in determining the sustainability of this trend.

While expectations for earnings growth have moderated, markets seem confident that the resilience of the U.S. economy will allow stocks to continue advancing.

On the calendar today:

-A&NZ consumer confidence

-US Aug PCE

-Centuria Industrial REIT ((CIP)) ex-div 4.08c

-Centuria Office REIT ((COF)) ex-div 2.53c

-Coventry Group ((CYG)) ex-div 3.75c (100%)

-Lindsay Australia ((LAU)) ex-div 2.8c (100%)

-Rural Funds Group ((RFF)) ex-div 2.93c

-Tasmea ((TEA)) ex-div 4c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

Corporate news in Australia:

-Brickworks’ ((BKW))  -$119 m statutory loss is its first in decades, amid declining building activity and major write-downs

-REA Group ((REA))  acquired a 19.9% stake in Athena Home Loans

-Hub24 ((HUB)) has partnered with Reach Alternative Investments, acquiring a minority stake

-The Star Entertainment Group ((SGR)) has written down -$819m from its Brisbane assets, including Queen’s Wharf, leading to total losses of -$4bn over the past two years

-Market speculation sees De Grey Mining ((DEG)) as the target of a buyout proposal from Agnico Eagle

-Qoria ((QOR)) is raising $25m by offering shares at 37c each to reduce debt and make a small acquisition

The Australian share market over the past thirty days

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

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