As widely anticipated, the US Federal Reserve (Fed) commenced its rate cutting pivot on 18 September, setting the stage for a strong month for risk assets. Somewhat surprisingly, the Fed cut by 50 basis points rather than the more typical 25 basis points. Other major central banks have likewise started to ease, and a boost to economic growth prospects was provided by a major stimulus package unveiled by the Chinese administration late in the month.
In the US, indexes ended September higher, with the benchmark S&P 500 up 2.02%, and up 20.81% year to date. The Dow Jones was up 1.85% for the month, and up 12.31% year to date, while Nasdaq rose 6.14% in September, and is up 23.18% year to date. Other global markets were mostly higher: Germany’s DAX was up 2.21%, the French CAC was flat, Britain’s FTSE was down -1.67%, and Japan’s Nikkei was -1.24% lower. Emerging markets were strongly positive.
The ASX 200 joined the party, and over September rose 2.20% to achieve a new record high. Mining was the ASX’s best sector, up on the back of China’s stimulus news and higher commodity prices. Technology was the second-best sector, supported by the best earnings growth momentum of the major ASX sectors. Health was the worst performing sector as earnings downgrades partly due to the appreciating AUD more than offset a generally positive market.
US and global bonds ended the month with yields slightly lower and prices higher. Australian 10-year yields were barely changed. Global bond yields have been in a downward trend since April on the back of softening economic data, with markets celebrating broad rate cutting policies amongst most developed economy central banks, and now confirmed by the Fed.
The AUD rose against the USD and is now up around 6% over the last 6 months. We think it could rise higher still, boosted by the Chinese stimulus package and higher commodity prices. Resources were mostly higher, especially industrial and precious metals.
China stimulus
As noted above, China launched a comprehensive stimulus plan to bolster its economy in the last week of September, the plan includes:
- Reduced reserve requirements for banks.
- Support for the real estate sector.
The People’s Bank of China (PBoC) lowered its seven-day reverse repurchase rate and mortgage rates, while also freeing up more capital for banks to lend. Further measures include increased lending for property acquisitions and potential relaxation of home buying restrictions in major cities. Markets responded with great enthusiasm, and the main Chinese share market index leapt around 12% in the space of a week.
Up until the stimulus announcement, Chinese policy makers had done the bare minimum to support growth during the 3-year property-driven downturn. The result was a growing loss of confidence among households, investors, and companies in China. The worry has been that expectations get entrenched, causing the economy to tip into a deflationary decline. The best interpretation of Beijing’s strategy is that this has now changed as Chinese policymakers began a more concerted effort to shift opinion and support the economy.
China’s economic growth rate and the trends within its economy have enormous implications for Australia. As would be expected, the stimulus announcements in Beijing boosted commodity prices and the AUD, although whether or not this is a sustainable change in direction remains an open question.
Outlook
At the end of the September quarter, we can observe positive sentiment across multiple markets now that the Fed has started cutting rates. At this stage at least, the US economic soft landing has been achieved. Yet prudence would suggest noting that positive sentiment is stretched, valuations are high, geopolitical/economy risks elevated, and uncertainty around policy and politics as election time approaches is growing. We conclude that a cautious and defensive stance remains sensible, even as positive market momentum appears to be the path of least resistance.