Aurelia Butler

As per analysts at BCA Research, these measures were primarily designed to fuel a rally in Chinese equities and “China plays” on the global stage, which have been in an oversold condition. This policy shift has created excitement in financial circles, leading to a rebound in market sentiment. The short-term effects of these policies appear to provide an adrenaline boost to Chinese stocks, with investors seeing an opportunity to capitalize on this surge.However, the key question remains: will this policy bazooka extend its effects beyond financial markets and stimulate the broader Chinese economy? BCA Research analysts express skepticism on this front, suggesting that while Chinese equities might see a temporary period of outperformance, the real economy remains mired in structural issues. Despite the recent announcements, the measures are unlikely to be a game-changer for China’s business cycle, at least not within the next six months.The critical obstacles lie in China’s ongoing debt deflation, weak household sentiment, and low confidence in private businesses and local governments. “This subsidy makes up only 0.8% of GDP and thus might not be a game changer,” the analysts said.As per BCA Research, this is insufficient to prompt a meaningful recovery, especially when China’s property market struggles and the household income growth is weak.Moreover, BCA notes that without substantial intervention—such as a large-scale quantitative easing program targeting the property sector—the property market will likely remain a major drag on the economy. Previous efforts, including a financing initiative for property developers in 2022, failed to deliver meaningful results. As a result, further monetary stimulus is seen as necessary to encourage borrowing and spending, though the real lending rates in China remain high in deflationary conditions.“Businesspeople remain suspicious of current government policies toward large private enterprises,” the analysts said. Additionally, local governments, already strained by debt and anticorruption campaigns, may be slow to embrace policies aimed at promoting growth. More

While tariffs are often seen as one-off price increases akin to specialized sales taxes, their influence on inflation is far more complex and pervasive. Analysts at UBS warn that the impact of tariffs extends beyond the immediate price hike at the consumer level, creating ripple effects that can exacerbate inflation through multiple channels.At their core, tariffs function as taxes on imported goods, with the cost typically passed on to consumers. This leads to an initial spike in prices, which might seem to be a temporary shift in the price level rather than the kind of sustained inflation that economists fear. However, the real inflationary impact of tariffs is not so straightforward. A deeper look reveals how tariffs can foster profit-led inflation, drive up wages, reduce market competition, and destabilize supply chains—all contributing to a longer-term inflationary cycle.One of the effects of tariffs is their ability to facilitate profit-led inflation. When a tariff is introduced, consumers often expect a proportional increase in prices, believing a 10% tariff should result in a corresponding 10% rise in the cost of goods. However, tariffs are levied on the import price rather than the final consumer price, meaning that the actual impact on retail prices should be far lower. For instance, a 10% tariff applied to the import price—often much less than half the consumer price—should translate to an increase of less than 5% at the retail level. In reality, businesses frequently use the imposition of tariffs as an opportunity to raise prices beyond what is justified by the cost increase, padding their profit margins. UBS analysts point out that this mechanism allows companies to obscure their motives behind the tariff story, leading to inflation that is driven not by higher costs but by inflated profits.This rise in prices, whether directly from tariffs or opportunistically inflated by companies, often has a second-order effect on the labor market, triggering higher wage demands. Workers, seeing their purchasing power eroded by higher prices on goods affected by tariffs, are likely to push for wage increases to compensate for the rising cost of living. When tariffs are broad-based, affecting a wide array of products and sectors, these wage demands can become widespread, influencing both traded and non-traded sectors of the economy. As businesses respond to higher labor costs by raising prices further, the economy risks entering a wage-price spiral, where rising wages and prices continuously feed off each other. UBS notes that this dynamic can become deeply entrenched, making it harder for inflation to subside once the cycle has begun.Beyond the immediate impact on prices and wages, tariffs also have a more insidious effect on market competition, which in turn fuels inflation. By imposing barriers to imported goods, tariffs reduce the competitive pressures that normally help to keep prices in check. When foreign companies face punitive tariffs, they may be discouraged from entering or maintaining a presence in a market where they face a prejudicial sales tax. Even after the tariffs are lifted, the damage to competition may be lasting, as companies are hesitant to reinvest in markets where they once faced protectionist measures. This reduced competition gives domestic companies more leeway to raise prices without fear of being undercut by cheaper foreign alternatives. UBS analysts argue that this long-term reduction in competition can create a more inflationary environment, as firms enjoy greater pricing power in the absence of external pressures to keep costs down.In addition to these demand-side factors, tariffs also exert inflationary pressure on the supply side by disrupting global supply chains. Modern economies rely on deeply integrated supply networks, with raw materials and components crossing multiple borders before they are assembled into finished goods. When tariffs increase the cost of imports, they raise the input costs for manufacturers, which are then passed on to consumers. This effect can be particularly pronounced in industries where the supply chain is complex and global, such as electronics and automobiles. According to UBS analysts, supply-side inflation caused by tariffs can be especially damaging because it not only raises prices for individual products but also disrupts the efficient flow of goods across borders, leading to further bottlenecks and cost increases throughout the economy.Taken together, these dynamics illustrate how tariffs can do far more than create a one-time bump in prices. They interact with broader economic forces, amplifying inflationary pressures in ways that are both direct and indirect. By enabling profit-led price hikes, driving wage demands, stifling competition, and disrupting supply chains, tariffs contribute to a sustained rise in prices that goes beyond their immediate effect. As policymakers weigh the potential benefits of protectionist measures against the risk of inflation, they must be mindful of these complex interactions.UBS analysts underscore the importance of considering these inflationary risks, especially in a global economy still recovering from recent bouts of inflation. While tariffs may serve as a tool to protect domestic industries or raise government revenues, their broader economic impact can reignite inflation just as it appears to be stabilizing.For governments and central banks, managing these risks will be essential to maintaining economic stability and avoiding a return to the high-inflation environment that so many are eager to leave behind. More

They note that while the Fed’s move was designed to show its commitment to staying ahead of inflation risks, the general expectation remains a series of 25bp cuts going forward. According to Powell, the Fed is still confident in the economy’s health and labor market, with further cuts depending on upcoming data like payrolls and consumer spending.The Morgan Stanley note emphasizes that the global central banking response will continue to be influenced by domestic conditions.For example, Brazil’s central bank recently hiked rates due to strong growth and a weaker currency, both signaling inflationary pressures. Conversely, Morgan Stanley says Indonesia’s central bank cut rates after its currency appreciated, reducing inflation risks. These examples are said to show how emerging markets balance global financial conditions with local economic factors.In developed markets, Morgan Stanley analysts expect little immediate reaction to the Fed’s move. In Europe, the European Central Bank (ECB) is expected to continue its cautious approach, with another cut likely in December. The Bank of England (BoE), which paused rate cuts in September due to inflation concerns, is projected to resume cuts in November. The Bank of Japan (BoJ), meanwhile, is likely to hold steady until early 2024.While the Fed’s 50bp cut hints at potential large shifts in the future, Morgan Stanley stresses that it does not indicate a fundamental strategy change.The easing cycle is still viewed as positive for risk assets, but uncertainties remain, particularly around the upcoming U.S. election and its potential effects on 2025 forecasts. More

In spite of calls for bold reform from figures like Mario Draghi, the European region seems destined to continue declining relative to its global competitors, particularly the United States, unless radical change is achieved.At the heart of Europe’s troubles is a major productivity gap. Since the adoption of the euro, the continent has steadily fallen behind the U.S., with a 47% GDP per capita deficit (adjusted for purchasing power parity) as of 2023. The core issue is low productivity, which accounts for 72% of this gap, while reduced labor contributions make up the remaining 28%. This echoes the concerns laid out in Draghi’s report, which frames Europe as too rigid, overly regulated, and fragmented across national borders. It is this fragmentation, along with insufficient investment in research and development, that leaves Europe trailing at the economic frontier.Europe is a currency union without a fiscal union, which is at the root of these problems. The euro binds together economies that are politically and economically divergent, which results in inconsistent policies, inefficient markets, and low levels of investment. BCA Research remains skeptical about Europe’s ability to adopt Draghi’s reforms, such as simpler regulation, greater market integration, and a coherent industrial policy. Afraid of losing their sovereignty, national capitals are hesitant to make the necessary changes. While Europe’s sickness is evident, it may not feel compelled to act until the pain is unbearable.A critical manifestation of this fragmentation is the disparity in investment between Europe and the U.S. On both the private and public fronts, Europe consistently invests less, whether it’s in infrastructure, innovation, or capital expenditures. Compared to the U.S., where higher returns on investment encourage more robust spending, Europe lags behind. The continent’s capital intensity, a key driver of productivity, trails that of the U.S., reflecting the lower rate of investment that characterizes European economies. As BCA Research notes, this trend is particularly worrying when examining sectors like telecommunications, where fragmentation across national markets prevents the emergence of economies of scale, diminishing profitability and stifling investment.While the region remains a leader in green technologies, it has fallen behind in digital technologies like artificial intelligence, cybersecurity, and quantum computing. These are crucial for maintaining competitiveness on the global stage, but Europe’s fragmented markets and insufficient investment in R&D leave it playing catch-up. According to BCA Research, venture capital deals in Europe lag by 80% compared to those in the U.S., underlining the continent’s lack of high-risk funding for technological advancements and new business ventures.Draghi’s proposed reforms would require Europe to boost its investment by €750-800 billion annually by 2030, focusing on energy transition, digital technologies, defense, and R&D. Yet, as BCA Research points out, this goal is unlikely to be met. The continent’s political landscape is fraught with resistance to deeper integration. National interests prevail, and countries like Sweden have already expressed opposition to key aspects of Draghi’s plan, such as the issuance of common bonds. Even France and Germany, the two largest economies in the EU, are paralyzed by political indecision, with little hope for meaningful progress until at least the next round of elections.The lack of a unified fiscal policy further exacerbates Europe’s challenges. The European Commission’s budget is significantly smaller than that of the U.S. federal government, leaving it unable to effectively smooth out economic shocks or direct large-scale investments. This is compounded by the absence of a capital market union, which prevents Europe from raising funds efficiently. As a result, countries like France, Spain, and Italy pay higher premiums on their borrowing than Germany, leading to further fragmentation and financial instability during periods of crisis. Without a more integrated fiscal policy, the continent remains vulnerable to these shocks.BCA Research warns that, structurally, European equities will continue to underperform relative to U.S. equities. The eurozone’s productivity issues and fragmented markets make it difficult for European companies to compete on the same level as their American counterparts. This trend is unlikely to reverse without significant reforms, which seem politically unfeasible in the near term. Moreover, Europe’s long-term economic prospects are hindered by stagflation—a toxic combination of weak productivity growth and declining labor force, alongside large entitlement programs that will drive demand far beyond what the supply side of the economy can meet. This mismatch will fuel inflation, which the European Central Bank may struggle to control, leading to more frequent financial crises and a structurally weaker euro.However, BCA Research does see some potential for Europe in the short to medium term. Over the next five years, Europe may see a period of cyclical outperformance. Global capital expenditure is expected to strengthen, benefiting European equities, particularly as tech stocks in the U.S. face a potential de-rating in the coming years. However, these gains would likely be temporary within a broader structural decline. More

PARIS (Reuters) -Shares in Moncler rose sharply on Friday after French rival LVMH invested in the Italian outerwear specialist, fuelling speculation about the long-term intentions of the owner of Louis Vuitton and Moet & Chandon champagne.Analysts said the news would likely revive speculation of a potential takeover of Moncler in the long term, but focused on the near-term advantages of the deal for LVMH, which reinforced its dominance in the $400 billion luxury sector.Shares in Moncler, which had fallen 6.5% this year, jumped as much as 15% in early trade after it was announced late on Thursday that LVMH had purchased a 10% stake in Double R, the investment vehicle controlled by Moncler CEO Remo Ruffini’s Ruffini Partecipazioni Holding. Double R currently has a 15.8% stake in Moncler. The deal amounts to an around 1.6% stake for LVMH in Moncler with the potential to grow it to 4% over the next 18 months, analysts said.”LVMH is getting maybe the opportunity down the road to be in the first row if and when Moncler could be up for grabs,” said Luca Solca, analyst at Bernstein.Moncler shares were up 10% by 0944 GMT, while shares in LVMH, down 7.5% year-to-date amid a slowdown in the luxury sector, were 2% higher.Milan-based Moncler, famed for its upmarket puffer jackets and one of the industry’s biggest success stories in recent years, had been seen as a potential acquisition target or merger candidate for rival luxury groups seeking to expand.LUXURY SECTOR BOOSTWhile LVMH’s stake is currently small, and will likely remain small for a while, the agreement recalls the French group’s investment in Italian luxury shoemaker Tod’s, said JPMorgan. A longstanding shareholder in Tod’s, LVMH in 2021 raised its stake in the Italian group to 10% in a move that sources at the time described of “friendly support”. “While LVMH has a track record of driving consolidation in the sector, it has also proven that it can play as a minority shareholder and a partner for the long term too,” said JP Morgan.News of the deal came on the day that Reuters reported China planned further stimulus measures, which boosted luxury shares, spurring hopes it will revive spending on high end goods. Investors have grown jittery about a slowdown in the luxury sector, particularly weakness in the key Chinese market, hit by slowing economic growth and a property crisis.”From LVMH’s perspective, we view this deal as opportune given current weakness across the luxury sector,” said Piral Dadhania, analyst at RBC.Moncler’s ratio of 12-month forward enterprise value to EBITDA is 10.66, compared with 31 for Hermes, which is the best performing luxury stock in recent years.Dadhania said that minority investments into well-established groups were “the next best alternative use of excess cash” as LVMH avoids share buybacks due to potential new taxes on such transactions in France, and while there is a lack of sufficiently large and credible M&A targets.Before the pandemic, Moncler had been seen as a potential tie-up candidate for French fashion group Kering (EPA:PRTP). Kering has since purchased high end perfumer Creed and a stake in red carpet label Valentino, while focusing on reviving sales at its star label Gucci, which fell behind rivals in recent years.Announcing the Moncler deal on Thursday, LVMH stressed support for Ruffini’s vision for the outerwear giant.Ruffini has fuelled Moncler’s growth through buzzy collaborations with fashion designers and celebrity-packed events, as well as acquisitions, purchasing smaller outerwear label Stone Island in 2020. More

NEW YORK (Reuters) -Treasury yields and the dollar fell while the Dow registered a record closing high on Friday as a subdued U.S. inflation report lifted expectations of an outsized interest rate cut at the Federal Reserve’s November policy meeting.A global stock index also reached a record high, helped by China’s stimulus boost, and European shares posted an all-time high close. The yen firmed against the dollar after Japan’s former Defense Minister Shigeru Ishiba looked set to become the next prime minister.The personal consumption expenditures price index, the Fed’s favored inflation measure, rose 0.1% in August after an unrevised 0.2% gain in July. Economists had forecast PCE inflation rising 0.1%. In the 12 months through August, the PCE price index increased 2.2% after rising 2.5% in July.Markets are fully pricing in a cut of at least 25 basis points at the Fed’s November meeting, with expectations for another upsized 50 basis point cut now up to 56.7% after the data, according to CME’s FedWatch Tool, from 49.9% before the release.Other data showed U.S. consumer spending increased slightly less than expected in August.The Fed kicked off its latest easing cycle on Sept. 18 with a 50 basis point cut in interest rates.Ongoing conflict in the Middle East, with Israel’s attack in Lebanon, also pushed Treasury prices higher in a flight-to-quality bid, pressuring their yields, analysts said.The yield on benchmark U.S. 10-year notes fell 3.5 basis points to 3.754%, from 3.789% late on Thursday. Fed Chair Jerome Powell “can breathe a little sigh of relief,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.”After pushing for a 50 bps cut instead of a more conventional 25 bps cut – the personal income and spending data so far vindicates that decision,” Jacobsen added. U.S.-listed shares of Chinese companies jumped on the latest series of stimulus measures from Beijing to boost the domestic economy.The Dow Jones Industrial Average rose 137.89 points, or 0.33%, to 42,313.00, the S&P 500 fell 7.20 points, or 0.13%, to 5,738.17 and the Nasdaq Composite fell 70.70 points, or 0.39%, to 18,119.59.All three major U.S. stock indexes posted a third straight week of gains.MSCI’s gauge of stocks across the globe rose 2.15 points, or 0.25%, to 852.84 and hit an intraday record high. Europe’s benchmark STOXX 600 index closed at a record high, ending up 0.5% at 528.08.China’s blue chips jumped 4.5%, bringing their weekly rise to 15.7%, the most since November 2008. Hong Kong’s Hang Seng index also gained 3.6% and was up 13% for the week, its best performance since 1998.China’s central bank lowered interest rates and injected liquidity into the banking system, and more fiscal measures are expected to be announced before week-long Chinese holidays starting on Oct. 1.Ishiba won the leadership contest of Japan’s ruling Liberal Democratic Party in a narrow victory. Ishiba is a critic of past monetary stimulus and told Reuters the central bank was “on the right policy track” with rate hikes thus far. Markets had been largely expecting a win for hardline nationalist Sanae Takaichi, an opponent of further interest rate hikes, pricing in loose monetary and fiscal policies and a weaker yen over the past week.Against the Japanese yen, the dollar weakened 1.82% to 142.17.The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was down 0.17% at 100.43 after falling to 100.15, its lowest since July 20, 2023, with the euro off 0.14% at $1.116.Aluminum prices in London touched a 16-week high on fund buying triggered by the latest economic stimulus measures in top metals consumer China.Three-month aluminum on the London Metal Exchange was 0.4% higher at $2,623 per metric ton in official open-outcry trading after hitting $2,659, the highest since June 6.Oil prices rose on Friday but fell on the week as investors weighed expectations for higher global supply against fresh stimulus China.U.S. crude rose 51 cents to settle at $68.18 a barrel and Brent edged up 38 cents to $71.98 per barrel.Spot gold was down 1% at $2,643.88 per ounce by 1742 GMT. Gold prices were headed for their best quarter in more than eight years. More