In today’s briefing:
- China: Record Bearish Positioning Ahead of Stimulus
- The Winners and Losers From Central Bank Stimulus
- Supportive Backdrop for US Equities, but the Events of 2000 Pose a Warning Against Complacency
- Is the Fed Ahead or Behind the Curve
- Technically Speaking, Breakouts and Breakdowns: HONG KONG (SEPTEMBER 30)
- Eurozone HICP Preview (Oct 1): Headline Back Below Target and Backed Up By Survey Signs
- FX Weekly Strategy: September 30th – October 4th
China: Record Bearish Positioning Ahead of Stimulus
- China & HK allocations among Global funds have hit new lows, with 25.5% of funds avoiding the region entirely and a record 79.6% underweight versus the benchmark.
- In the six months leading up to recent stimulus measures, another 5.4% of funds fully exited their China & HK exposure.
- Tencent and Alibaba are well below their 2020 highs, while AIA Group ownership moved lower and China Construction Bank continues its long-term decline
The Winners and Losers From Central Bank Stimulus
- Markets have taken on a risk-on tone on the news of global central bank stimulus. Gold has rallied the most as real rates fell, equities rose and bond prices fell.
- But the market’s risk-on psychology appears to be stretched and fragile.
- While the long-term bullish trend is quite real, the consensus is susceptible to reversals should growth disappoint in the near-term.
Supportive Backdrop for US Equities, but the Events of 2000 Pose a Warning Against Complacency
- There is a possibility of a repeat of the events in 2000 Q4 and 2001 Q1, when economic conditions unravelled quickly and labour hoarding crushed corporate profits and equity valuations.
- Lower interest rates will typically support equities unless the corporate sector has committed large and persistent strategic mistakes, such as excessive investment or bad lending.
- Unfolding political events could push the economy into recession, despite the best efforts of the Fed. Profligate fiscal policy conduct could present challenges for the economy after the election.
Is the Fed Ahead or Behind the Curve
- Bonds expect a second half-point cut at the next FOMC meeting, which is rare outside of recessions, while stocks are cheering the prospects of a soft landing.
- As the Fed’s focus shifts from its price stability mandate to its full employment mandate, investor expectations will depend on the strength of the jobs market.
- As leading indicators of employment weaken, the upcoming September Jobs Report could prove to be pivotal to market psychology.
Technically Speaking, Breakouts and Breakdowns: HONG KONG (SEPTEMBER 30)
- Hong Kong dollar is strengthening as demand picks up and the carry trade unwinds quickly. Put/Call Skew declines for HSTech Index as traders sentiment reverses.
- Hengan International Group (1044 HK) and Galaxy Entertainment Group (27 HK) had breakouts from declining wedge patterns and have now formed new uptrends.
- Wuxi Biologics (2269 HK) had a breakout reversal from a U-shaped pattern indicating more upside. The stock’s 200 DMA may provide little resistance to further re-rating.
Eurozone HICP Preview (Oct 1): Headline Back Below Target and Backed Up By Survey Signs
- Lower fuel prices will be a key factor in September’s HICP, pulling y/y rate to 1.9%, which would be lowest in three years and despite little change in services inflation.
- Indeed, the risk is of an even lower outcome. This may be short-lived given adverse base effects later this year before a more sustained fall below 2% occurs through 2025.
- But the September projection is in line with ECB thinking as it leads to a Q3 outcome of 2.2%.
FX Weekly Strategy: September 30th – October 4th
- US employment report will be the focus. EUR/USD upside looks more restricted. Still scope for JPY and AUD gains.
- The US employment report at the end of the week is the main focus. We look for a significantly stronger than consensus report, with a 180k rise in non-farm payrolls
- This suggests an underlying USD positive pict ure for the week, but the payroll number isn’t released until Friday.
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