Morning Bid: China Rate Cuts Looming, US Booming

By Jamie McGeever

The trading week in Asia begins under a generally positive global outlook, driven by ongoing strength in U.S. stocks. However, local market sentiment remains cautious due to the persistent uncertainties surrounding China’s economic challenges.

This Monday, the People's Bank of China (PBOC) is expected to reduce its loan prime rates. This decision is part of Beijing's broader strategy to provide monetary, fiscal, and liquidity support aimed at stabilizing its struggling property sector, reviving economic growth, and combating deflation.

PBOC Governor Pan Gongsheng communicated at a financial forum in Beijing on Friday that the bank plans to cut the LPR by 20 to 25 basis points, as reported by the official Xinhua news agency.

On the same day, the PBOC rolled out new initiatives to infuse over $100 billion into China’s stock market. This resulted in a substantial 3.6% increase in Shanghai's blue-chip equity index, marking a notable recovery for the index, which had its best performance since September 26.

Despite the worries, China's financial data released on Friday was not as dire as anticipated. The GDP growth rate for the third quarter was slightly better than expected at 4.6%. However, economist Phil Suttle pointed out that the preceding two quarters of economic performance were particularly poor, showcasing a growth rate of just 2.75% on a seasonally-adjusted annualized basis, the weakest in recent history apart from the COVID-19 shutdowns.

This context explains why Beijing feels compelled to take action. While the stock markets have reacted positively, bond yields are decreasing again after initially rising on expectations of economic support through significant bond issuances. Currently, the yield on 10-year bonds is once more approaching the 2.00% mark.

Concerns regarding U.S.-China trade relations are resurfacing. According to a report by the Wall Street Journal, Republican presidential candidate Donald Trump has threatened to impose tariffs of up to 200% on China if tensions escalate over Taiwan.

Meanwhile, the U.S. economy continues to show exceptional strength. Recent economic indicators have surpassed forecasts, GDP growth is projected to exceed 3%, corporate earnings reports are strong, and stock markets are reaching new highs.

Nevertheless, some analysts suggest that the current optimism might be excessive. Experts at Raymond James caution that short-term market signals are becoming skewed, indicating that the market could be at risk for a phase of consolidation or a potential pullback.

Globally, financial conditions are easing as central banks lower rates and stock markets rise. For investors in Asia, close attention will be paid to the U.S. dollar, which has recently recovered and is now at a three-month peak.

Key Developments to Watch

As we move into the week, several key events could influence market directions on Monday:

• China loan prime rate decision
• Malaysia GDP report for Q3
• Speech by Reserve Bank of Australia Deputy Governor Andrew Hauser

China, US, stocks, economy, bonds