4 October 2024
Weekly Market View
A new dawn in China?
The return of ‘animal spirits’ in China’s stock market thanks to a decisive turn in policy could lead to further near-term upside. However, we believe a large fiscal stimulus is likely needed to sustain the rally.
Meanwhile, the long-term market impact of the ongoing flare-up in Middle East tensions is likely to be limited if Iran’s oil supplies are not affected. Gold and energy stocks and bonds remain our preferred hedges against any oil shock.
In FX markets, we see a rangebound USD/JPY in the near term after Japan’s new PM Ishida downplayed the need for further BoJ rate hikes for now.
Also, any CNH upside is likely to be limited, with momentum indicators sending a bullish signal for USD/CNH.
The next focus is on the US employment, inflation and Q3 corporate earnings reports. Indications of job market resilience, further disinflation and earnings beats are likely to fuel the USD and the record-breaking US equity rally.
Should investors chase China equities at this stage?
What is the outlook for US Q3 corporate earnings?
How could Middle East geopolitical risks impact financial markets?
Charts of the week: Significant catch-up potential
Following the policy boost, China’s stocks can potentially unwind their significant underperformance in recent years
Hang Seng index and base, bullish and bearish scenarios
Relative returns of MSCI China, MSCI Asia ex-Japan* indices
Source: Bloomberg, Standard Chartered; *vs. MSCI All Country World index (100 = September 2019)
Editorial
A new dawn in China?
The return of ‘animal spirits’ in China’s stock market thanks to a decisive turn in policy could lead to further near-term upside. However, we believe a large fiscal stimulus is likely needed to sustain the rally. Meanwhile, the long-term market impact of the ongoing flare-up in Middle East tensions is likely to be limited if Iran’s oil supplies are not affected. Gold and energy stocks and bonds remain our preferred hedges against any oil shock. In FX markets, we see a rangebound USD/JPY in the near term after Japan’s new PM Ishida downplayed the need for further BoJ rate hikes for now. The next focus is on the US employment, inflation and Q3 corporate earnings reports. Indications of job market resilience, further disinflation and earnings beats are likely to fuel the USD and the record-breaking US equity rally.
China’s near-term upside potential: The near-term bullish case for China stocks argues for a further c.10% potential upside in the coming weeks (see chart above and page 4). This is especially so given low global investor positioning and inexpensive valuations after the significant underperformance of China stocks vs. global equities over the past five years.
Authorities have vowed to provide more support to revive the stock market if the current proposals, totalling 2% of the onshore equity market capitalisation, prove insufficient. Given this, we believe investors who are still underweight China have an opportunity to rebuild exposure towards a benchmark allocation. Those who are neutral or overweight China can consider adding to laggards in our preferred consumer discretionary and communication services sectors, as well as high dividend yielding state-owned enterprises.
Challenges in sustaining the rally: A longer-term stock market upturn likely requires a sustained revival in economic growth and a stable property market. This, in turn, potentially requires a fiscal spending boost significantly larger than the 1-2% of GDP currently expected. For context, the last major fiscal policy stimulus in 2015-16, which resulted in an 80% trough-to-peak stock market rally, entailed a 10% of GDP
boost in cumulative net government borrowing. There is also the risk of trade tensions with the US, especially if former President Trump returns to power. Given this, we maintain our 6-12-month allocation to China equities in line with global benchmarks.
Hedging against Middle East tensions: The flare-up in the Middle East raises the chance of accidents. However, we see limited long-term market impact from the escalation unless Iran’s oil installations are attacked. The US administration has little incentive to disrupt Iran’s oil supplies and risk higher oil prices heading into the November elections, given its ongoing battle to tame inflationary pressures. Nevertheless, those looking to hedge against any short-term energy shocks can consider gold and energy sector stocks and bonds.
Rangebound JPY: Japan’s new PM Ishiba has played down the need for another imminent BoJ rate hike, although his stated policies imply further BoJ policy tightening in the months ahead to curb inflation. We see any near-term upside in USD/JPY limited to 149. A hawkish turn in BoJ policy, possibly after the US election, could take the pair down to 140.
Downside risk for EUR: Euro area inflation below 2% and a continued downturn in the region’s manufacturing and construction sectors have raised the prospects of another 25bps ECB rate cut in October. Markets are pricing total 50bps of cuts by December and over 160bps of cuts in the next 12 months. The latest weak data raise the risk of further EUR/USD downside, especially if upcoming US data surprises positively.
US jobs, inflation, earnings reports in focus: US equities need a resilient September employment report (consensus: 150,000 net jobs), sustained disinflation and Q3 earnings beat (S&P500 consensus: 5.3% y/y) to sustain this year’s rally. Fed Chair Powell’s plans to cut rates further to forestall any further deterioration in the job market is potentially positive for stocks.
The weekly macro balance sheet
Our weekly net assessment: On balance, we see the past week’s data and policy as neutral for risk assets in the near-term
(+) factors: Supportive China policies; disinflation in Europe and US
(-) factors: Escalation in Middle East conflict
The US labour market has continued to soften
US quits, hiring and job openings rate
US manufacturing remains in contractionary territory
US ISM manufacturing PMI and subcomponents
Euro area headline inflation eased below the ECB’s 2% target for the first time since 2021
Euro area headline and core inflation y/y
Top client questions
Should investors chase China equities at this stage?
There has been much FOMO (Fear Of Missing Out) activity by global investors in China equities, based on strong inflows (the largest since mid-2022) into foreign-domiciled ETFs. In our view, this likely explains the rapidity of the market rally in recent days.
For Chinese equities to move higher longer-term, though, the participation of local investors after the National Day holidays is key. Expectations-beating fiscal stimulus, supportive of consumer spending-led growth, is likely to lead to our ‘bull case’ scenario range of 22,500-24,500 for the Hang Seng. Should the fiscal support come in later, or is smaller in magnitude, than expected, the index may pull back to a ‘bear case’ scenario range of 18,000-20,000.
Overall, valuation levels are still depressed, and Chinese equities are still offering an approximately 19% discount to Asia ex-Japan equities. Our preferred sectors of consumer discretionary and communication services and our non-financial high-dividend yielding SOEs idea can offer opportunities for rotation into laggards.
— Daniel Lam, Head, Equity Strategy
Hang Seng Index (HSI) rose above its 5-year median
HSI 5-year median, resistance, Base/Bull/Bear scenarios
What is the outlook for US Q3 corporate earnings?
Major US banks will report their Q3 earnings next week, after managing down expectations in the past month. For the overall US market, Q3 is expected to see the lowest earnings growth in 2024. Consensus expectations from LSEG I/B/E/S for the S&P500 benchmark are for Q3 earnings to grow 5.3% y/y led by the technology (+15.4%), communication services (+12.3%) and healthcare (+11.2%) sectors. Two sectors are expected to see a fall in Q3 earnings, namely energy (-19.7%) and materials (-2.8%). S&P500 earnings growth are expected to accelerate in Q4 (+12.9%) and Q1 2025 (+14.4%).
In addition to Q3 earnings surprises, we will be watching how companies’ guidance affect consensus growth expectations for 2024 and 2025. S&P500 earnings are expected to grow by 10.0% in 2024, nudged down from 10.7% expected at the start of July, and by 15.0% in 2025, nudged up from 14.4% expected at the start of July. Our base case for a soft landing in the US economy is supportive of this expected growth acceleration from 2024 to 2025 and underpins our preference for US equities. Our US sector preferences take a barbell approach with overweight views in technology and communication services for growth exposure, financials as a soft-landing beneficiary and healthcare for defensive exposure.
— Fook Hien Yap, Senior Investment Strategist
Q3 2024 is expected to see the lowest earnings growth this year before an acceleration in Q4 2024 and Q1 2025
Consensus earnings growth y/y for S&P500 index
Top client questions (cont’d)
How is China’s policy stimulus going to impact CNH?
China’s PBoC recently delivered a 50bps cut to the reserve requirement ratio and a 20bps cut to the policy rate. These were accompanied by a broad set of measures to support housing demand, and policymakers signalled further policy easing lay ahead.
These announcements initially pushed USD/CNH lower, but the pair has rebounded over the last few days. We see two key underlying risks ahead: i) further fiscal stimulus is likely needed to support domestic consumer confidence, and ii) A Trump win in the US election in November is likely to resurface worries of a surge in tariffs on Chinese exports, directly raising risks for the Asian economic and currency outlooks.
We, therefore, believe that CNH strength is likely to be capped. Technically, USD/CNH’s momentum indicator (MACD) is sending a gradually more bullish signal, indicating potential upward pressure and a likely test of the next resistance level at 7.1360. Meanwhile, support remains at 6.9710.
USD/CNH downside is likely to be capped
USD/CNH and technical levels
Does Ishiba’s election impact the JPY outlook?
USD/JPY fell as much as 1.8% after Shigeru Ishiba was set to become Japan’s next prime minister. He has called for more clarity on the BOJ’s plans to normalize policy and emphasized greater development of regional economies to revitalise the rural areas, aided by government spending.
However, USD/JPY pared back losses and rose 2% following his comment that Japan’s economy is not ready for further increases in interest rates, an apparent effort to shake off his reputation as a monetary hawk.
While sensitivity to Ishiba’s comments may be high in the very short term, from a currency market perspective, we still see relative interest rate differentials as the key driver. This US-Japan interest rate spread is still narrowing amid expectations of Fed rate cuts. Meanwhile, Japanese inflation has been resilient, the labour market is strong and real household income growth has been sustainably rising since the end of 2023.
On balance, we expect USD/JPY to trade within a relatively wide range between 140 and 149 over the coming month. Over a longer 6-12-month horizon, rate differentials ultimately argue for a fall below this range to 135.
— Iris Yuen, Investment Strategist
USD/JPY remains largely rangebound
USD/JPY and technical levels
Top client questions (cont’d)
How could Middle East geopolitical risks impact financial markets?
A scenario analysis can be helpful to consider how regional geopolitical risk could impact global financial markets. One scenario is that, similar to prior episodes, any further military action is focused on avoidance of any significant or lasting escalation. From a financial market point of view, this would likely mean any volatility in equities or regional bond yield premiums proves fleeting. A second scenario is one where military action ends up triggering a more significant escalation. For financial markets, this increases the risks of rising equity and regional bond market volatility, and the outperformance of US government bonds and gold as safe havens.
Oil prices remain the key channel of transmission to financial markets. This helps explain why the market impact has thus far been relatively muted. This also suggests investors looking for a short-term hedge can consider US energy sector equities and bonds given their correlation with oil prices.
More broadly, current risks are consistent with our asset allocation Overweight to gold. High quality bonds (particularly US Treasuries) should also do well in an environment of volatility. Equities may face the most volatility in scenario 2, but for longer term investors this is likely to create an opportunity to add exposure if the US economy otherwise remains on a soft-landing path. Chinese equities also offer an opportunity to diversify sources of returns given the market is currently more focused on domestic policy drivers.
— Manpreet Gill, Chief Investment Officer AMEE
— Cedric Lam, Senior Investment Strategist
Energy bond yield premiums typically tighten when oil prices rise
Bloomberg IG Energy Index vs Brent Oil Price (since 2014 to date)
Market performance summary*
Our 12-month asset class views at a glance
Economic and market calendar
The S&P500 has next interim resistance at 5,844
Technical indicators for key markets as of 3 Oct close
Investor diversity has normalised across asset classes
Our proprietary market diversity indicators as of 3 Oct close
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As a Professional Client you will not be given the higher retail client protection and compensation rights and if you use your right to be classified as a Retail Client we will be unable to provide financial services and products to you as we do not hold the required license to undertake such activities. For Islamic transactions, we are acting under the supervision of our Shariah Supervisory Committee. Relevant information on our Shariah Supervisory Committee is currently available on the Standard Chartered Bank website in the Islamic banking section. For residents of the UAE – Standard Chartered UAE (“SC UAE”) is licensed by the Central Bank of the U.A.E. SC UAE is licensed by Securities and Commodities Authority to practice Promotion Activity. SC UAE does not provide financial analysis or consultation services in or into the UAE within the meaning of UAE Securities and Commodities Authority Decision No. 48/r of 2008 concerning financial consultation and financial analysis. Uganda: Our Investment products and services are distributed by Standard Chartered Bank Uganda Limited, which is licensed by the Capital Markets Authority as an investment adviser. United Kingdom: In the UK, Standard Chartered Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. This communication has been approved by Standard Chartered Bank for the purposes of Section 21 (2) (b) of the United Kingdom’s Financial Services and Markets Act 2000 (“FSMA”) as amended in 2010 and 2012 only. Standard Chartered Bank (trading as Standard Chartered Private Bank) is also an authorised financial services provider (license number 45747) in terms of the South African Financial Advisory and Intermediary Services Act, 2002. The Materials have not been prepared in accordance with UK legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research. Vietnam: This document is being distributed in Vietnam by, and is attributable to, Standard Chartered Bank (Vietnam) Limited which is mainly regulated by State Bank of Vietnam (SBV). Recipients in Vietnam should contact Standard Chartered Bank (Vietnam) Limited for any queries regarding any content of this document. Zambia: This document is distributed by Standard Chartered Bank Zambia Plc, a company incorporated in Zambia and registered as a commercial bank and licensed by the Bank of Zambia under the Banking and Financial Services Act Chapter 387 of the Laws of Zambia.