The Overnight Report: China Re-ignites Optimism

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By Chris Weston, Head of Research, Pepperstone

China is having a rare moment in the sun and while few have confidence that the laundry list of monetary measures detailed yesterday will have any lasting effect in driving consumption and animal spirits, Chinese assets and its proxies are responding emphatically.

Shorts are covering aggressively, and longs should ride this wave of improved sentiment through the remainder of the week.

Copper, rebar futures and Dalian iron ore futures have seen big buying, and the upbeat sentiment has lifted crude and gold.

The switching we saw through the ASX200 yesterday, with funds moving out of banks and into materials names, should continue through trade today, and we’ve seen this switch play out in the S&P500, although Nvidia has also come to the party with buyers stepping in on reports that CEO Jensen Huang has finished selling down part of his equity holdings.

Few are surprised at the timing of the measures announced yesterday – the Chinese authorities have been keen to defend the 3200 level in the CSI300, and not-so-subtly guide market participants to the value’ on offer in an index trading on a 10x multiple.

An outsized rally into China’s Golden Week holiday and the 75th anniversary of the People’s Republic of China (starting 1 October) was always a distinct possibility and there is certainly room for more upside as shorts capitulate and momentum-focused traders align with the positive flows.

However, taking a more cynical view, the cutting reserve ratio requirements and lending rates, and incentivising buying of equity will not alter the fact that households and businesses are paying down debt, increasing savings and have a negative expectancy of property prices.

US 2yr Treasuries have closed -5bp lower, with the 2s vs 10s curve has bull steepened into 19bp, and the combination of yuan inflows and weaker US data has resulted in broad USD selling on the day another big tailwind for Chinese and HK equity appreciation.

 AUDUSD has been well traded as we eye a move into 0.6900.

 We can also see the US swaps market pricing a 50% chance of a further -50bp cut at the 7 November FOMC meeting, although this pricing will be conditional on next week’s US JOLTS and non-farm payrolls report being sufficiently weak enough to invoke the Fed’s economic put.

 So, the bulls will be feeling pretty good about life right now the Fed has told us they will go hard on easing on any further fragility in the labour market, the US economy is already tracking at 3% in Q3, US corporate earnings are expected to increase 17.5% this year, and now China has pulled out the big guns to lift asset prices.

Traders are selling volatility, which just brings in new price-insensitive equity buyers, and lower bond yields are lifting the present value on equity and corporate credit trades at multi-year tights granted, it’s hard to put new money to work chasing risk here given the lofty valuations, but to most traders and those with a need to beat a benchmark, valuations play a secondary consideration to price.

On the calendar today:

-Australia Aug CPI

-US Consumer confidence

-AGL Energy ((AGL)) AGM

-Cedar Woods Properties ((CWP)) ex-div 17c (100%)

-Imdex ((IMD)) ex-div 1.30c (100%)

-Nick Scali ((NCK)) ex-div 33c (100%)

-Premier Investments ((PMV)) Qtrly earnings report

-Red 5 ((RED)) AGM

-Sigma Healthcare ((SIG)) Half year earnings report

-WH Soul Pattinson ((SOL)) earnings report

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

Corporate news in Australia:

-SG Fleet’s major shareholder, Super Group, has halted the sale of its 53% stake due to difficulties in finding a cash buyer

-E&P Financial Group ((EP1)) seeks ASX delisting

-The Queensland government plans to transform Star Entertainment’s ((SGR)) looming tax bill into a Treasury loan, offering the casino operator much-needed financial relief

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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