Monday Espresso Podcast - 30th September 2024

[00:00:00] Raj Manon: It's Monday the 30th of September, the last trading day of the third quarter. I'm Raj Manon covering some of the key market news from last week. So markets started the week in a positive mood following the large interest rate cuts we saw from the US the previous week. Last week it was the turn of the world's second largest economy.

[00:00:19] Raj Manon: China's central bank surprised the market and announced a range of stimulus measures. The biggest monetary stimulus we've seen since the pandemic. Today we have Alex King joining us, our analyst for the Asia and emerging market sectors. Alex, what has been announced?

[00:00:36] Alex King: Thanks, Raj. Yes, the People's Bank of China announced that they have cut the 7-day reverse repo rate.

[00:00:43] Alex King: Which is the interest rate at which the central bank borrows money from commercial banks by 20 basis points to 1.5%. And reduce the required reserve ratio held by banks by 50 basis points. They also cut mortgage interest rates and lowered minimum down payments All of which is consistent with the previous measures we've seen out of China post pandemic and the housing crisis.

[00:01:05] Alex King: What was most surprising about this recent package was the inclusion of a 53-billion-pound swap facility, which allows institutional investors to swap bonds, ETFs, and large cap stocks for treasury bonds, effectively allowing investors to take on more leverage to buy stocks.

[00:01:22] Raj Manon: That's really interesting. So I suppose what's really interesting is there's a number of different measures all being announced at the same time.

[00:01:30] Raj Manon: So what has been the market impact?

[00:01:33] Alex King: Well, unlike previous stimulus packages which have been broadly ignored by the market and not sufficient to impact the economy This package has so far been well received by the market Chinese equities rallied by a whopping 12.5% last week. Prior to that it was the worst performing major stock index in the world year to date and now it is the second only to the US market. Chinese government bonds have also reacted positively to the news with 10 year government bond yields. Hitting a record low of 2% during the announcement.

[00:02:04] Raj Manon: And to give this some further context, how does this affect the wider Asia region?

[00:02:09] Alex King: Well, despite India recently taking over China as the largest market of various emerging market indices, China is still viewed as the most important economy in the Asian region.

[00:02:20] Alex King: And a strong Chinese economy would benefit the region more broadly particularly as Chinese household spending picks up.

[00:02:27] Raj Manon: Thank you, Alex. That's really insightful and it will be interesting to see if these measures are enough to reach their ambitious 5% growth target. So turning to the US, on Friday we had the Fed's preferred inflation measure, PCE.

[00:02:41] Raj Manon: This increased 0.1% from the previous month. This was less than expected and it points to a slowing inflation trend and therefore supports the case for further interest rate cuts. Also last week we had PMI survey data from the US, the UK and Europe. So this is a forward looking indicator for the health of the manufacturing and services sectors.

[00:03:05] Raj Manon: So a number above 50 indicating expansion. We had a strong reading from the US 54.4 so slightly above forecasts showing business activity remains at robust. In the UK a reading of 52.9 so slightly below forecasts, but the 11th consecutive month in expansionary territory. But in contrast the PMI from Europe highlighted the mixed economic performance that we've been seeing from the various countries within Europe.

[00:03:34] Raj Manon: So PMI data falling for the fourth consecutive month to 48.9. It was activity in France in particular that fell sharply following the temporary boost we saw from the Olympics. So it's looking like the ECB behind the curve and with inflation continuing to ease It strengthens the case for a third interest rate cut next month.

[00:03:59] Raj Manon: So turning to the week ahead Alex, what should investors be looking out for?

[00:04:04] Alex King: Well, we have CPI data coming out of Europe tomorrow as well as more US PMI data. Towards the end of the week, we have US non farm payrolls and US unemployment and job openings data, which will give an indication as to the health of the US labour market.

[00:04:20] Alex King: So lots to look forward to

[00:04:22] Raj Manon: Lots to look forward to and a positive week for the markets last week and for Asia in particular. We have been seeing broader market participation and we do think that's a healthy development for the market. So lots to digest. If you have any questions please get in touch.

[00:04:38] Raj Manon: Thank you for listening and we will be back next week with more insights.