Weekly Market Update - week of the dragon

The latest economic news and market highlights from the UK, US and Asia.

Key takeaways:

🚀 Chinese stocks roar back – Equities in China had their best week since 2008, after leaders vowed "necessary fiscal spending" to meet the country's economic growth target. The government also cut the amount of cash banks must keep in reserve and lowered a key policy rate, part of a broad stimulus package that aims to shore up the slowing economy.

📉 European inflation plummets – Concerns over a slowdown in the European economy increased after both France and Spain saw inflation fall to below 2% for the first time in 3 years. 

💼 US Jobs report boosts optimism - US jobless claims hit a four-month low, sending stocks to record highs for a 42nd time this year. 

🏦 Fed officials point to further easing – Several Fed officials teased the prospect of additional large rate cuts, with Chicago Fed President Austan Goolsbee noting that “we have a long way to come down to get the interest rate to something like neutral.”

🎌 Enter Shigeru, Japan appoints new PM – The Yen spiked after the ruling Liberal Democratic Party selected Shigeru Ishiba as their new leader.

Global central banks are stepping up, taking proactive steps to boost liquidity and ward off the winds of deflation. The Chinese stimulus has had a significant impact, with much of the uplift being felt in their home markets, though positive effects are spreading globally.

Optimistic investors are often rewarded for their patience over the long-term, and this is another case in point.  There’s been a lot of doom and gloom about China this year, and their stocks had lagged other regions. But that has corrected without prior warning, and investors have received extremely healthy returns in the last few days alone.

Missing out on the best days of market returns can make all the difference to outcomes, so investors who have been diversified across a broad range of regions would have benefitted from China’s return in fortunes.

A resurgent China, the world’s second largest economy, is important for the success of broader global markets, along with continued strength in the US. So far, so good for the soft landing.

Chart of the week 

Average 12-month return in excess of inflation, 1926-2023 

Source: Schroders, September 2024

This chart highlights how US small caps have typically outperformed when inflation lies between 1-3%. After years of high inflation and small cap underperformance, US CPI is now in that sweet spot, with indices such as the Russell 2000 outperforming the S&P 500. This shift in economic conditions could signal a period of new dominance in the market, away from the ubiquitous big tech names with success shared across a broader range of stocks.

Labouring to record highs: The strength of the US labour market boosted stocks this week, with the S&P 500 hitting a new high for the 42nd time this year.

UK stocks in favour: UK companies have been attracting increased merger and acquisition bids, with offers totalling over £100bn - up 54% from last year. Despite a dip in oil prices hitting Shell and BP, stocks have continued to edge up.

China to the rescue: The China A50 and Hang Seng soared, as Chinese indices saw their best week in over 15 years. The central bank said that it would adjust the reserve requirement for banks, unlocking over $120 billion in additional lending. Officials hinted they would also provide a capital injection of up to $145 billion into banks to further support the economy.

Precious gains: Gold and silver advanced once again this week, thanks to macroeconomic conditions and the geopolitical environment favouring the safe-haven assets.

The will to drill: Oil weakness continued, with Saudi Arabia reported to be committed to increasing output in December, in a bid to regain market share. Crude production could also return to Libya, with rival factions reaching an initial deal on steps forward.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.