What’s fueling the rally in Chinese equities?

Executive summary:

  • Chinese stocks are surging amid a raft of new stimulus measures 
  • Despite a big rate cut, U.S. Treasury yields are rising
  • The health of the U.S. labour market is a key investor watchpoint

On the latest edition of Market Week in Review, Senior Director and Chief Investment Strategist for North America, Paul Eitelman, and Head of AIS Portfolio & Business Consulting, Sophie Antal-Gilbert, discussed the rally in Chinese equities. They also chatted about why U.S. Treasury yields are rising in the wake of the Federal Reserve’s (Fed) jumbo-sized rate cut and previewed upcoming watchpoints for investors.

Reports of more stimulus lead to surge in Chinese stocks

Antal-Gilbert and Eitelman began by exploring the factors powering the recent sharp rally in Chinese stocks. Noting that the MSCI China Index was up 17% the week of 23 Sept as of market close 26 Sept Eitelman said one of the catalysts behind the rise was a report of more stimulus measures from China.

He explained that in a 26 Sept Politburo meeting, Chinese officials stated that they intend to stop the decline in the nation’s housing market, a major engine of growth for China’s economy that has slumped in recent years. Government leaders also expressed their intent to make fiscal policy more supportive for growth moving forward, Eitelman said.

“While the specific details on how these objectives will be accomplished aren’t known yet, this is certainly good news from a signaling perspective. It shows that China is willing to step in and provide more support for its economy, which has been ailing for the better part of the past two years,” he remarked.

In another encouraging sign, the People’s Bank of China (PBOC) announced a raft of stimulus measures on 24 Sept, including rate cuts and a lowering in the reserve requirement ratio for banks, Eitelman said. In addition, the PBOC put into place tools to try to incentivize banks to buy into China’s equity market and boost sentiment for stocks, he said.

Taken together, these developments sparked a dramatic move higher in Chinese equities, Eitelman noted, pointing out that up until recently, China had been a fairly unloved area of the market. “Ultimately, the remarkable rally in Chinese stocks is a good reminder that less bad–or incrementally positive–news can be really good from a financial market perspective,” he stated.

Why are U.S. Treasury yields rising as the Fed eases?

Pivoting to the U.S., Antal-Gilbert asked Eitelman why Treasury yields have been rising even though the Fed recently cut interest rates by 50 basis points (bps). Eitelman said the counterintuitive upward tick in yields is likely due to recently released macro data indicating that the U.S. economy remains resilient.

Perhaps most important among the latest slew of data points was the weekly initial U.S. jobless claims number, which unexpectedly fell to a four-month low in the week ending 21 Sept, he said. “This was interpreted as a sign of U.S. labour-market resilience,” Eitelman stated, explaining that the health of the slowing jobs market has been a key question for many investors lately. “Importantly, numbers like these show there’s not really any signs of a layoff cycle beginning, which is good news for the health of the consumer going forward,” he said.

Health of U.S. labour market remains key watchpoint

Antal-Gilbert and Eitelman concluded with a look at key upcoming investor watchpoints. Eitelman said chief among them is the U.S. employment report for September, which will be published by the Labour Department on 4 Oct.

“Investors are closely watching the U.S. labour market for clues on whether the U.S. economy is heading toward a soft or hard landing. The consensus estimate for job additions in September is pretty positive, with most analysts anticipating nonfarm payrolls growth of around 140,000,” he remarked. If these projections prove true, financial markets will likely be pleased, Eitelman said. On the flip side, if the labour market adds fewer jobs than expected, an uptick in volatility is possible due to recent market sensitivities around the health of the jobs market, he concluded.