With the Chinese New Year being celebrated from Saturday for a week, the Chinese say goodbye to the year of the Rabbit and welcome in the year of the Dragon, a year of evolution, improvements, good luck and abundance… or so they hope.
Chinese authorities, however, are gearing up for a gunfight, as they try to quell the volatility gripping their stock market. Premier Li Qiang is advocating for “forceful” measures to restore stability. This call to action signals a decisive shift in strategy, akin to breaking out the big guns, as China mulls mobilising a staggering two trillion yuan ($281 billion), primarily sourced from the offshore accounts of its state-owned enterprises, to stabilise markets.
The shake-up doesn’t stop there. China’s acting Vice Mayor of Shanghai, Wu Qing, colloquially known as “the broker butcher” due to his zero-tolerance stance towards market irregularities and unscrupulous traders, has now assumed the mantle of chairman of the securities regulator, which is poised to steer China’s financial landscape towards calmer waters. This bold move underscores the government’s commitment to bolstering investor confidence and revitalizing market sentiment.
Against this backdrop of uncertainty, Wednesday’s data unveiled a stark reality: China’s consumer prices plummeted at their fastest pace in 15 years. However, analysts remain cautiously optimistic, attributing the downturn to seasonal factors surrounding the Lunar New Year and are anticipating a potential rebound in the coming months.
Amidst mounting apprehension, the prospect of economic stimulus has emerged as a beacon of hope, catalysing a surge in Chinese stocks. The People’s Bank of China (PBoC) has further fuelled this improving sentiment with an unexpected, larger-than-anticipated, reserve requirement ratio cut. PBoC Governor, Pan Gongsheng, has also fanned the flames of optimism with ambitious plans ranging from establishing a new credit market department to slashing interest rates on low-cost funds.
Yet, amidst the flurry of grand gestures, the pressing question lingers: will these extraordinary measures suffice to win back the trust of disillusioned investors and reignite China’s economic engine, let alone propel it towards double-digit growth once again?
As China navigates this delicate balancing act, the efficacy of its policy interventions and the resilience of its economy will stand as a litmus test in an era defined by uncertainty and flux. The path to stability and prosperity remains fraught with challenges but China is hoping that its strategic foresight and decisive action will help chart a course towards sustained growth and prosperity. Welcome the Year of the Dragon!
Mixed sentiment across global indices
On Thursday, the S&P 500 and the Nasdaq 100 hovered around record highs, exhibiting little change, while the Dow Jones edged up by 50 points. Investor focus remained fixed on corporate earnings, with entertainment company Walt Disney stealing the spotlight as its shares surged over 11%, propelled by increased guidance and robust earnings that surpassed expectations. Semi-conductor manufacturer Arm Holdings also made waves, jumping nearly 48% after issuing a bullish profit forecast. Conversely, international tobacco company Philip Morris saw a dip of 2.6% after missing earnings forecasts and providing a cautious outlook for 2024. Meanwhile, energy and petroleum giant ConocoPhillips remained relatively steady despite beating earnings and revenue projections.
In Europe, the FTSE 100 rebounded thanks to positive corporate updates, with fast moving consumer goods company, Unilever’s shares gained 3% following increased fourth-quarter sales and a significant share buyback plan. British American Tobacco soared by 7.1%, contributing to the index’s near 2% rise.
In Frankfurt, the DAX 40 was flat as investors awaited key speeches from policymakers. Industrial conglomerate Siemens saw a modest uptick, despite challenges at its factory automation unit, with first-quarter profits slightly surpassing expectations.
In Asia, the Nikkei 225 Index rallied to its highest level in over three decades, propelled by strong corporate earnings and dovish remarks from a Bank of Japan official. Multinational investment house SoftBank surged 11.1%, after its subsidiary, Arm Holdings, rose 48% following an upbeat quarterly report.
Brent crude on the up and up
Brent Crude futures surged above $79.50/barrel on Thursday, marking the fourth consecutive session of gains. The narrative around the oil price is largely unchanged with the recent gains, once again, being fuelled by escalating tensions in the Middle East. Israeli Prime Minister, Benjamin Netanyahu’s rejection of a ceasefire offer from Hamas, coupled with concerns over potential US military actions against Iranian forces, intensified supply disruption fears. On the demand side, official data revealed a significant drop in US gasoline inventories, by 3.15 million barrels last week, far surpassing forecasts. However, US crude stockpiles saw a substantial increase of 5.5 million barrels, exceeding market expectations.
In contrast, gold prices dipped to around $2,020/ounce on Thursday, coming under pressure from a strengthening dollar and Treasury yields. Investors continued to weigh the trajectory of monetary easing by the Fed amidst upbeat economic data from the US and hawkish comments from bankers. Despite resilient job market indicators, such as a larger-than-expected decrease in initial jobless claims to 218,000, Fed officials like Boston Fed President Susan Collins reiterated their stance on potential interest rate cuts only later in the year. This sentiment diminished the appeal of bullion, reflected in the markets’ reduced probability of a Fed rate reduction in March, which is currently priced in at less than 20%.
Dollar claws back recent losses
The US Dollar Index saw a rebound to above 104.3, recovering from recent losses as data reinforced the Fed’s reluctance for rate cuts. With initial jobless claims falling to 218,000 and continuing claims decreasing to 1.871 million, market sentiment shifted towards a more hawkish tone.
Meanwhile, the euro rebounded slightly, to trade above $1.075/€, after hitting a two-and-a-half-month low on 5 February. Cautious statements from major central banks in Europe and the US, including European Central Bank board member Isabel Schnabel’s emphasis on patience when considering interest rate adjustments, influenced market sentiment. Eurozone consumer inflation expectations decreased to 3.2% in December, their lowest level since February 2022, adding to the cautious outlook.
Similarly, the pound remained steady at $1.26/£ after touching a seven-week low. Bank of England (BoE) Deputy Governor Sarah Breeden hinted at a shift in focus towards maintaining current interest rates, signalling a delay in potential rate cuts. BoE Chief Economist Huw Pill echoed this sentiment, suggesting that the timing for the first cut is still distant. Robust economic data from the Royal Institute of Chartered Surveyors and UK financial services company Halifax indicated ongoing resilience in the UK housing market, further stabilising the pound.
BRENT CRUDE: $81.51
Sources: Refinitiv, Bloomberg and Trading Economics.
Written by Citadel Global Director, Bianca Botes
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