More stimulus before holiday

The week kicked off with another bull run in Chinese stocks on further stimulus news. This time, three major cities announced to ease homebuying rules to prop up their housing market. The Chinese Communications Constructions surged another 7% following a stellar week, the CSI 300 added another 6% and is up by 25% since the mid-September dip, and the HIS index gained another 3%. The Chinese will be going on national holiday in an excellent mood, and investors – though skeptical that the measures will help lifting the EM giant in the long run – could give some time to the measures to show in the economic data. But data-wise, we are not there just yet. The previous measures announced by the Chinese authorities have barely borne fruit. The Caixin manufacturing index for example unexpectedly shrank into the contraction zone in September, and the services PMI is on the edge, near the 50 level that differentiates expansion from contraction. The Chinese EV sales fell by 48% - and the EU hasn’t yet increased import tariffs on China-made EVs. But anyway, China and its investors are breathing a sigh of relief… the CSI 300 had its best week since 2008, after all. Iron ore is up by 25% since mid-September. And the good news from China and the rising iron ore prices give a decent support to the AUDUSD, preparing to test the 0.70 cents level as Australian stocks extend rally to fresh ATH.

Over in Europe, growth and China-sensitive European stocks are also having their share of the Chinese pie. The Stoxx 600 index closed the week at an ATH. LVMH gained 20% in just a week.

In separate news, inflation data from France and Spain came in lower than expected. Both data slipped below the European Central Bank’s (ECB) 2% policy target in September. German inflation numbers are due today and the Eurozone’s aggregate inflation update is due tomorrow. Softening inflation, combined with Europe’s gloomy economic outlook, has room to boost the ECB rate cut bets, and keep the EURUSD offered near the 1.12 level – even against a broadly softening US dollar.

Across the Channel, Cable consolidates a touch below the 1.34 level and the FTSE 100 is better bid. The Chinese stimulus news is good for the British mining stocks. Increased negative pressure on oil prices weighed on the index last week, after the news that Saudi Arabia was looking to change strategy and focus on increasing its market share rather than trying to prop up oil prices by restricting output. The good news is, even oil seems to be boosted by the Chinese stimulus news since last Friday. Support is building near the $67pb level in WTI.

In Japan, mood is totally different since last Friday. Last week’s elections in Japan resulted in a surprise win of Shigeru Ishiba, who is known for his preference for higher interest rates. The USDJPY tumbled from above 146 to around 142 last Friday and is consolidating gains near this level, the Nikkei index tumbled more than 5% on Friday, sank below its 200-DMA, tested the 50-DMA to the downside and is back to around the 200-DMA this Monday morning. The 3% slump in industrial production in August certainly helped taming the yen bulls, but the rest of the data was good enough to keep the downside pressure in the USDJPY intact; the 140 level is totally within the reach of the yen bulls, especially given the sustained selling pressure on the US dollar, worldwide.

In the US, the data released on Friday printed a set of soft inflation data. The core PCE index, the Federal Reserve’s (Fed) favourite gauge of inflation, came in line with expectations on a yearly basis, and slightly lower than expected, and softer than last month on a monthly basis. The latter reinforced the expectation that the Fed’s next move could be a second 50bp cut. That probability currently stands at 55%, the US 2-year yield remains under pressure, and the major stock indices consolidate near their ATH levels. Friday’s PCE data didn’t spark a fresh wave of buying in the S&P500, but the index renewed record a few times during the course of last week, and the Dow Jones pushed to a fresh high on Friday.

This week, the attention shifts to the US jobs data – expected to print another NFP figure near 140Ks, the unemployment rate is seen stable near the 4.2% while the average earnings may have eased significantly from 3.8% to 3.3% on a yearly basis. A soft set of jobs data should keep the Fed doves in charge of the market.

Elsewhere, the US ports along the East and Gulf coasts are about to go into a strike this Tuesday, as the unions demand higher pay. The market doesn’t seem much worried for now, as most goods are believed to be already in for the upcoming holiday shopping season, but a strike is never good news for supply chains and prices. An extended period of disruption in ports could boost the prices of goods that flow into the country from these ports and generate an upward pressure on inflation.