China Stocks Poised to Extend Stimulus-Fueled Gain: Markets Wrap

(Bloomberg) — US and European equity futures inched lower while Asian shares pared some of their earlier gains as investors mulled the sustainability of China’s rally.

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Chinese stocks rose as traders continued to bet Beijing’s wide-ranging stimulus package would help drive a market turnaround and kickstart the country’s sluggish economy. The offshore yuan strengthened past 7 for the first time since May 2023 while the dollar hit an eight-month low.

Investors are cautiously optimistic that the policy barrage has put a floor under China’s stock slump, with expectations that more fiscal support will follow. A slowdown in the world’s second-largest economy had been a major overhang for Asian stocks and a meaningful recovery as a result of the policy support may help drive gains across the region.

The stimulus that helped the regional stock gauge soar to the highest level since February 2022 was the latest positive news for equities and currency markets, already benefiting from the Federal Reserve’s outsized rate cut last week. Emerging Asian currencies also jumped, led by the Malaysian ringgit and Thai baht.

“China’s latest package of easing measures to support the property and stock markets is a positive move,” wrote Morgan Stanley economists including Chetan Ahya, in a note Tuesday. “However, we think investors won’t see the measures as sufficient to address deflation. The measures will not be effective in boosting much-needed consumption.”

Hong Kong’s short sales ratio as a percentage of market turnover dipped to 13.6% on Tuesday, one standard deviation below average since 2016, indicating many shorts have already been covered, according to JPMorgan Chase & Co.

In a further filip to shares, China’s central bank on Wednesday lowered the interest rate charged on its one-year policy loans by the most on record.

Support measures unveiled by Chinese authorities Tuesday included interest rate cuts, more cash for banks, bigger incentives to buy homes and plans to consider a stock stabilization fund.

“The liquidity boost expected from China may have some positive spill-over via commodities and the supply chain, so EM equities and currencies are likely to be boosted,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “The optimism may be raising the bar on follow-through details and measures, so if not substantial enough, things can fizzle.”

The policy boosts came after Chinese stocks hit a five-year low as the government’s piecemeal approach to stimulus had failed to fix a crisis of confidence, with deflationary pressure, anemic consumption and an extended property slump combining to erode hopes of a near-term economic recovery. Therefore, the latest efforts may only buy China some time given the scale of challenges facing the economy, according to analysts.

Overnight in the US, the reading on the Conference Board’s gauge of consumer sentiment posted the biggest drop since August 2021. The report also flagged concerns about a slowdown in the labor market while manufacturing data also came in weaker than expected.

“The decay in the perceptions of jobs available was striking,” said Carl Weinberg, chief economist at High Frequency Economics. “It also will deliver a warning message about the state of the economy to financial markets.”

Swaps traders increased their wagers to more than three-quarters of a point of policy easing by year-end from the Fed, suggesting at least one more major US cut is in store, after the data. Investors are awaiting data on the Fed’s preferred price metric and US personal spending later this week for further clues on the depth of future reductions.

A Bloomberg gauge of commodities rose for an 11th day, set for its longest winning streak since January 2018. Iron ore rallied and gold hit another record.

In the corporate world, German software developer SAP SE, product reseller Carahsoft Technology Corp. and other companies are being probed by US officials for potentially conspiring to overcharge government agencies over the course of a decade.

Key events this week:

ECB President Christine Lagarde speaks, Thursday
US jobless claims, durable goods, revised GDP, Thursday
Fed Chair Jerome Powell gives pre-recorded remarks to the 10th annual US Treasury Market Conference, Thursday
China industrial profits, Friday
Eurozone consumer confidence, Friday
US PCE, University of Michigan consumer sentiment, Friday