09/30/2024

Investor optimism took a giant step last week, as China announced a broad stimulus package that completely changed the market dynamic, especially with regard to Asian and European stock markets. The announced package includes not only measures to support the severely affected real estate sector but also fiscal measures to help consumers, although further details are needed for a proper assessment.

While many analysts believe that the announced measures may be insufficient, it is clear that the concerted efforts by the authorities over the past week indicate that China is starting to take its structural problems seriously. The country's leaders are not ignoring the urgency of a policy response.

Therefore, the key lies not so much in what China has announced, but in what might come next. On this front, various reports suggest that an extraordinary debt issuance may be approved, which could be directed towards measures to stimulate consumption and support local governments. These measures could, of course, have significant effects on the country's growth in 2025.

Two other factors drove investor euphoria over the past week. Firstly, macroeconomic data released in the United States continued to support the narrative of a soft landing, as no signs of a sharp contraction in economic activity were observed.

The other driver of optimism was Micron Technology's earnings report, which exceeded consensus expectations and provided revenue and profit forecasts that restored investor confidence in the demand for artificial intelligence-related chips.

As a result, the surge in risk appetite spread across multiple asset classes, benefiting global stock markets, commodities including gold, corporate credit, cyclical sectors, and cryptocurrencies. Almost all financial assets enjoyed the rally.

In emerging markets, the Chinese stock market had its best week since 2008, with its most representative indices climbing by an impressive 25% in just five sessions. Emerging Asian markets ended the week with gains of over 9%, while Latin American stock markets also benefited from the strong rebound in commodity prices.

However, the intense recovery in recent weeks has pushed many indices into technically overbought territory, particularly in Asian markets, signalling the need for caution.

In the short term, we face three risks that could impede the trajectory of global stock markets. The first relates to the upcoming American presidential election, which is just over a month away and marked by significant uncertainty. Political risk will therefore remain very high in the coming weeks.

Geopolitical risk has also intensified in the Middle East, and following the death of the Hezbollah leader at the hands of Israel, further escalation of the conflict cannot be ruled out. Finally, macroeconomic data is inherently volatile, and any release that undermines the soft landing narrative will have negative implications for markets, as we saw in early August and September.

That said, we remain confident that the Fed will succeed in its dual mandate and maintain price stability and economic activity in the US. This suggests that any pullback in equity prices will be seen by investors as a buying opportunity, and that, in the medium term, the upward trend in equities is likely to continue