Global investors remain in the fog on China

After Beijing’s weekend stimulus update fell flat, global investors were left in a fog, but Wall Street charged ahead like a runaway train. The S&P 500 and Dow extended their blistering rally, setting the stage for Tokyo to get in on the action when markets reopen after a three-day break.

Chip stocks soared despite the U.S. Treasury market being closed for Columbus Day, and the third-quarter earnings buzz kept markets humming. With JP Morgan and Wells Fargo leading the charge last Friday, the big banks like Citi, Bank of America, and Goldman Sachs are poised to release their quarterly numbers on Tuesday, fueling expectations for more financial fireworks.

Meanwhile, the dollar hit its highest level since mid-August, riding a safe-haven bid sparked by China’s "Joint Sword 2024B" war games near Taiwan, which Washington labelled as "destabilizing." The greenback also retaliated against the yuan after investors were left unimpressed by China’s stimulus details—or lack thereof. Instead of new fiscal fireworks, Beijing merely shuffled its economic deck.

Predictably, the yuan took a hit, sliding to 7.09 per dollar—the lowest since mid-September—and has slumped about 1% since China’s central bank rolled out aggressive stimulus in late September. Meanwhile, gold and oil prices dipped as markets bet the Fed would ease by a more modest 25 basis points at the November meeting, thanks to the economy’s steady performance without any signs of overheating. But it's that specific soft-landing narrative that is keeping Wall Street stocks on a record-breaking trajectory.

U.S. rate futures are now pricing in an 87% chance of a 25-bps cut in November, with only a 13% chance of a pause. The Fed Watch Tool signals that traders are banking on a slow but steady Fed easing cycle.

The dollar, pushing close to the 150 yen mark, suggests Tokyo’s Nikkei could build on Friday’s highs and add to its staggering 27% rise since early August. However, Fx traders are mindful that the stability at the upper bounds in Tokyo equities creates an opening for the Bank of Japan to step up with a Q4 rate hike. If they decide to seize the moment after the election, it could shake things up dramatically, rippling local and global stock markets while sending shockwaves across currency markets.

As for China, U.S.-listed Chinese stocks took a hit on Monday as investors pre-emptively cut exposure, bracing for a potential Trump win in the upcoming U.S. elections. The logic? No major US allocator wants to up their stakes in Chinese markets before a possible tariff-heavy Trump presidency.

With demand faltering and deflation knocking at the door, China’s once-booming export machine is losing steam fast. Monday’s data showed exports grew just 2.4% in September—a steep slowdown from August and a sign that exporters may have front-loaded shipments to avoid Western tariffs.

Beijing knows the clock is ticking, especially with the U.S. election right around the corner. While recent moves to prop up the economy are a step in the right direction, bigger concerns loom. Suppose China’s manufacturing and export sectors—the backbone of its economy—start to wobble. In that case, the already shaky property market will face even more strain, turning what is already a ticking time bomb into a full-blown crisis.

The sheer scale of the unsold housing stock is mind-boggling. According to the IMF, unfinished presold units are eight times the annual completion rate—about 60 million units. Clearing this backlog is a herculean task that could take years, if not decades, to resolve. Any hope of a quick recovery in China’s housing market is unrealistic. The property crisis casts a long, dark shadow over China’s economic future. Without meaningful reforms, a healthy dose of trillions, not billions of Yuan, support the road to recovery will be anything but smooth.

All eyes are on Beijing this month, but this latest rally could fizzle as fast as it started unless the big guns are brought out.