@theMarket: China Stimulus Boosts World Markets

A week after the U.S. central bank's policy shift, Chinese authorities unleashed their monetary policy dragon. The move caught world financial markets by surprise and launched the Shanghai Composite index up more than 9 percent in three days.

 

The People's Bank of China (PBOC) launched its largest stimulus package since the pandemic. The PBOC cut interest rates, reduced the reserve requirement ratio, and introduced structural monetary policies to stabilize Chinese markets, which went straight down for months. 

 

Wall Street analysts are overwhelmingly negative on the Chinese market. Investments in Chinese stocks by  Institutional investors worldwide are at multi-decade lows. China's faltering economy, the never-ending wall of American-led sanctions and tariffs by several nations, coupled with the U.S. election promises of even more to come have made the world's second-largest economy practically uninvestable.

 

"Doubtful at best" was the knee-jerk response to the stimulus package earlier in the week. It would not be enough to bail out the economy say the professionals (who have banked big profits on shorting Chinese financial markets). China watchers insisted that fiscal spending was required for a true turnaround.

 

Almost on cue, President Xi Jinping called for even more monetary and "necessary fiscal spending" support on Thursday in a meeting of the Politburo, the second-highest circle of power in the ruling Chinese Communist Party. That sent Chinese markets rocketing higher again and pulled up global markets, especially in Asia along with it.

 

The largest gainers have been in the commodity space, especially copper. This makes sense. A pick-up in economic growth in China, as the world's marginal buyer of commodities, will mean higher demand for everything from precious metals to soybeans, to basic materials to luxury goods.

 

Did this week signal just a short-term trading opportunity, or has China now made a cyclical low? If the latter, the impact (given that China is the world's second-largest economy) could galvanize growth worldwide, especially among emerging markets. It could also fuel global asset inflation. That would put a kink in the Fed's efforts to reduce inflation in the months ahead.

 

I suspect traders will be watching for additional moves in fiscal spending before deciding. In the short term, however, technical charts say there are more gains to come on the upside. For those who want to roll the dice, there are plenty of Chinese exchange-traded and mutual funds. One could also buy an emerging market fund that includes China.

 

In U.S. markets, U.S. jobless claims fell again last week but the data point of the week was Friday's Personal Consumption Expenditures Index (PCE) for August. The Fed's favorite inflation index came in cooler than expected with a gain of 0.1 percent, less than the forecasted 0.2 percent gain. That good news and the revised GDP report for the last quarter (a solid 3 percent growth rate) gave additional evidence of a potential soft landing for the economy. 

 

On the political front, the presidential race is a toss-up, but the thinking is that both the House and the Senate will surely be divided between the two parties. If so, the markets won't care who wins because nothing will get passed in the years ahead. Markets love that kind of situation. Just look at the last two years' stock market performance in the face of a dysfunctional divided Congress. 

 

October begins next week however the seasonal factors that usually influence the performance of the stock market in September and October have been trumped by the Fed's surprise rate cut and now the potential turnaround in the Chinese market. Stocks should continue to perform with some commodities, precious metals, and emerging markets, leading gains. Overall, I see higher levels, maybe 5,900-6,000 on the S&P 500 Index as possible.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.