China policymakers go full throttle as the atmosphere buzzes

US stocks soared on Thursday, clearing the runway for fresh record highs as investors basked in a wave of positive news. A trifecta of optimism ignited broader market gains: robust US economic data, Micron's (MU) stellar earnings, and China’s ramped-up stimulus pledges. This cocktail of confidence keeps the bull market charging ahead, just in time for today’s critical PCE reading, which is expected to deliver more good news on the inflation front and fuel a Friday Wall Street’s victory lap.

The atmosphere is buzzing, especially with chatter intensifying about another jumbo rate cut from the Federal Reserve. Traders are now betting there's a 60% chance of a hefty 0.5% cut in the November meeting, a sharp jump from the 40% odds just a week ago. Momentum is building as the markets brace for what could be a back-to-back high-octane jumbo rate cut sugar rushes.

Meanwhile, the government is going full throttle in China to revive its flagging economy. From promises to boost fiscal spending to tackling the property market woes and propping up the stock market, it’s clear that Beijing is pulling no punches. Mainland stocks are riding the wave of this newfound optimism, with the CSI 300 index skyrocketing and on track for its most decisive week in a decade. It’s a green tsunami sweeping the East, and the bullish sentiment is reigniting reflationary fires across global markets.

On the oil front, prices are still trading soft after yesterday’s sharp decline. Saudi Arabia seems to have thrown in the towel on hitting that elusive $100 per barrel target, with rumors swirling that Riyadh may shift focus to reclaiming market share. December could see the unwinding of voluntary production cuts, adding more barrels to the global market. Libya’s production may also rise, thanks to a breakthrough in negotiations between rival factions, further weighing on oil despite a significant drop in US weekly inventories.

Saudi Arabia, as the de facto leader of OPEC, had pinned hopes on China driving incremental oil demand this year. However, with China's economy struggling to gain traction and potentially facing a prolonged delay before the real economy feels the full effects of stimulus measures, oil demand has fallen short of expectations. I believe OPEC is beginning to recognize the structural shifts in China's driving habits, where nearly half of all new cars sold are now electric vehicles (EVs) or hybrids. This shift is gradually reshaping long-term oil demand forecasts from the region.

Turning to currencies, the Chinese yuan is stealing the show, trading below the critical 7.00 level as real flows ignite a surprise sub-7.00 rally. The outlook for Asian currencies remains bright, buoyed by the Fed’s dovish trajectory and hopes for a Chinese economic rebound. But it’s not just Asia FX basking in the stimulus afterglow—G10 risk currencies like the Aussie (AUD) and Kiwi (NZD) are grabbing the spotlight, enjoying a double boost from both East and West positive sentiment.

The yuan’s strength has a gravitational pull on the euro, dragging EUR/USD closer to the key 1.1200 mark. We’re eyeing a potential breakout to 1.1300, once month-end US dollar demand eases and the undeniable soft dollar trend reasserts itself. After all, Europe’s economy is far more intertwined with Chinese demand than the US.

The yen has been held in check heading into the weekend. The Bank of Japan’s communicated lack of urgency to move the policy needle has put a damper on the yen’s rally impulse. Yet buoyant global risk sentiment, fueled by China’s reflationary boost, has prompted selling in yen crosses. Still, with the Fed primed to cut rates significantly through 2025, any USD/JPY rebound from here on out could be fleeting.