The week ahead: China stock rally, UK data revised lower and Payrolls

Another day, and another rally for Chinese stocks. The CSI index is higher by more than 8%, driven by developers and tech. The Hang Seng is higher by 4%. This comes after there was further policy easing for the property sector, three major cities have reduced restrictions on buying property. The surge in shares also come ahead of the October holiday in China. Turnover in Chinese equities was 2 trillion yuan on Monday, the highest level since 2015. Investors are ignoring the economic data from China, the Caixin composite PMI for September fell to 50.3, just above expansion territory. However, the market is not focused on this data, as it is measuring activity before the massive stimulus package, instead, October’s data will matter more for markets. The Chinese stock market rally will take a breather during the October holiday, which will give investors time to take stock and to decide whether the Asian powerhouse’s shares have further to run.

China stock market gains fail to spread global cheer

Stock markets gains are not broad based on Monday, and Japan’s Nikkei dropped more than 5%. This comes after some disappointment about the new prime minister, who has pledged to continue with the policies of his predecessor. However, we could see some volatility for Japanese shares, as a general election has been called for next month. Added to this, Eurostoxx futures are pointing to a lower open today, and US S&P 500 futures are also pointing to a lower open.

UK economic data mixed as we move into Q4

There has been a plethora of UK economic data released this morning. The Q2 GDP report was revised slightly lower, the Quarterly growth rate was revised lower to 0.5% from 0.6%, the annual rate was 0.7% from 0.9%. This is still stronger than the 0.2% growth rate in the Eurozone, although it is weaker than the US’s rate. The data was mixed. The final details of the Q2 report shows stronger business investment and capex spending, and a lower-than-expected current account deficit, although it was higher than Q1’s level. Also released this morning was Lloyds business confidence, which fell in September. This could be linked to next month’s Budget as business confidence in the next 12 months was higher than August, which suggests that the Budget could be weighing on confidence in the short term. The worrying part of this index was that price expectations for the next 12-months rose sharply, to its highest level in more than 5 years. This suggests that businesses are hoping to put up prices in the final quarter of the year, which is bad news for consumers, and it could make life tricky for the BOE as it tries to reduce interest rates.

In contrast to the GDP data, the September house price data surged in September, rising more than expected. House prices rose 0.7% on the month and 3.2% YoY, the highest rate since early 2023. This suggests that the BOE rate cut in August is already impacting the UK housing market, and it defies other data that shows a weak consumer in the UK. Overall, the UK economic data is relatively strong compared to Europe, but confidence remains a weak spot. We shall have to see if this materializes into weaker growth down the line. The pound is still the strongest performer in the G10 FX space so far this year, and it had a decent September, although GBP slipped against the yen. We continue to think that a more cautious stance from the BOE compared to other central banks will lend support to the pound as we move into Q4.

What to expect in the week ahead

Last week was pivotal for risk sentiment. Chinese equities had their best weekly performance since 2008. European equities also surged, with large gains for the Eurostoxx index, the Cac and the Dax, which rose more than 4% last week. The FTSE 100 rose more than 1% and US indices had smaller gains, although the Nasdaq Golden Dragons index, which includes US-listed Chinese tech stocks, surged by a quarter.

Unified monetary easing spurs risk rally

The driver was a massive Chinese stimulus package, but there is also policy easing on all corners of the globe, from Beijing to the US to Europe. Some European sectors are highly leveraged China, including luxury, German car markers and German industrial stocks. They all rallied strongly last week. However, European stocks were also given another boost by surging expectations of an October rate cut from the ECB. There is now an 82% chance of a rate cut priced in for the ECB for next month, this is up from a 26% chance the week prior. There is a 53% chance of a 50bp rate cut from the Fed in October, and the market is convinced that the BOE will also cut interest rates at its meeting in November. A unified easing cycle is a powerful driver of risk sentiment, and will have implications for stocks, commodities and currencies as we move into Q4.

The market narrative shifts

The market narrative has shifted from fears about a recession and global economic slowdown, to major central bank stimulus and a 180-degree shift in risk sentiment. Financial market dynamics have also changed. The CBOE 3-month implied correlation index, which measures the correlations between the top 50 stocks on the S&P 500, has started to move higher in September. This means that the largest stocks on the S&P 500 are moving in unison, for most of the summer this correlation was falling. Stronger correlations between the top 50 stocks suggests that the rally is broad-based, the S&P 500 made a number of fresh record highs last week, although it faltered slightly on Friday. However, it can also be risky. If the biggest stocks on the S&P 500 index are more correlated on the way up, that means that they could fall in unison on the way down, which could exacerbate any sell off. While risk sentiment is higher for now, there are concerns about high valuations, particularly for US stocks. While we think the risk rally will continue this week, any Q3 earnings disappointments could knock sentiment later in October.

Wave of positive risk sentiment lifts multiple asset classes, but oil is driven by geopolitics

Correlations between stocks are not the only ones rising, cross asset correlations are also rising as we move into Q4. This is another sign that the risk rally is gaining momentum. Emerging market stocks have started to outperform developed market stocks, industrial and precious metals rallied strongly, especially iron ore, aluminum and copper. Gold and Silver were both higher by 1%, however, they underperformed relative to other industrial metals, and gold backed away from record highs on Friday after the weaker than expected PCE index in the US. Oil prices missed out on the rally completely, and Brent crude fell more than 6% last week, while WTI fell more than 4%. However, oil prices are rising once more on Monday, with large gains for the WTI and Brent, as tensions rise in the Middle East. Geopolitics are a powerful driver of oil prices right now, so it is worth watching the news flow.

Shifting sands for the S&P 500

US stock market gains were not spectacular last week, even though the index reached fresh record highs. There is a shift occurring in US stocks that is worth noting. Wynn resorts and Las Vegas Sands were the top performing stocks on the S&P 500 last week, and both stocks were higher by more than 20%. Estee Lauder was another top performer, along with United Airlines and Bath and Body Works. Investors are betting that the US consumer will splurge now that interest rates are coming down, they may also be expecting a resurgence in deep-pocketed Chinese tourists. The question is, can these stocks steal the limelight from the Magnificent 7 as we move into Q4? Tech has done well this month, and Tesla’s stock price has rallied by 24%, however Nvidia has fallen by 5%. AI is still a major theme for markets, however rather than the chip makers dominating the S&P 500 in September, the S&P 500’s electricity sector was the best performer in the index. Electricity companies are in demand as they will power AI generation and application in the real economy. Thus, AI is far from dead, even if Nvidia is struggling.

A lot rests on earnings season for AI

But all may not be lost for Nvidia. The end of Q3 is approaching, which means earnings season will be getting into full swing. There are concerns that Nvidia and other AI names will not be able to continue to deliver stellar earnings growth indefinitely. However, Micron, an AI model-training company, delivered higher than expected earnings last week for the quarter that ended in August. It reported a 93% YoY gain in earnings per share, and it reported strong revenues across its business lines. This is considered bullish for the entire sector and may be a sign that Nvidia’s earnings growth can continue to wow investors when it reports earnings in the coming weeks. Palantir also reported strong revenue growth and an increase in customer numbers that could see investors warm to the AI theme once more.

US labour market data to determine size of next rate cut

While risk appetite and shifting investor tastes are dominating market moves, economic data is also worth watching this week. In the US, economic data will be all about jobs. The Fed is focusing more on jobs and the unemployment rate compared to inflation to avoid letting a soft economic landing slip through its grasp. This week’s NFP report could determine whether the Fed cuts by 50bps or 25bps when it next meets in November. The market is expecting payrolls to grow by 146k for September, up a touch from the 140k increase in August. The unemployment rate is expected to remain steady at 4.2% for September. Average hourly earnings are also expected to remain steady at 3.8% YoY. Thus, we may not get a definitive answer from this week’s labour market report. Due to this, it is also important to watch the JOLTS job openings data that is a good gauge of the underlying strength of the US labour market, and the weekly jobless claims data. The JOLTS job openings data is expected to trend lower and remain at its lowest level since 2021. The weekly jobless claims data may also tick higher for last week. Any significant change could shift the dial for Fed rate cut expectations. Overall, we expect US economic data to continue to point to a soft landing for the US economy, which is risk positive.

VP debate in the US as Harris grabs the lead

The first Vice Presidential debate will also take place on Tuesday. With just over 1-month to go until election day, every debate has the potential to shift public sentiment. The latest RealClearPolitics polls suggest that Kamala Harris has a narrow lead over Donald Trump. However, a month is a long time in politics. While we don’t think that political risk will disrupt the current market rally, no clear winner from the election, and a prolonged battle between Trump and Harris would be negative for risk sentiment in November, in our view.

The recent volatility in the oil price, means that this week’s oil inventory data is also worth watching. US oil inventories are close to their lowest levels since November 2023, any further decline might help to shore up the oil price after last week’s sharp sell off.

Europe’s CPI report to cement an ECB rate cut

European CPI for September is released on Tuesday. The headline CPI rate is expected to fall below the 2% target rate to 1.8%, the lowest level since 2021. The market has already rushed to price a rate cut from the ECB next month, and a weak CPI reading could be the final piece of the puzzle. The euro climbed last week, and we expect EUR/USD to be driven by dollar weakness in the next few weeks. The single currency has opened mostly unchanged vs. the dollar at the start of this week, and it remains around $1.1160.

Will falling UK prices weigh on Tesco’s earnings?

Earnings season also gets under way. In the US, Nike reports earnings on Tuesday. In the UK, JD Sports will be a good test of consumer strength in the UK when it reports its results on Wednesday. Tesco will also report results on Thursday. Will falling food prices and CPI in the UK weigh on their profits for the last quarter? Tesco’s share price is higher by 3% in September, and it has outperformed the overall FTSE 100. It is also higher by more than 23% so far this year.