Economy

LONDON (Reuters) – Global investors are preparing to stake bets on China again, in a major sentiment shift sparked by Beijing’s drive to reverse its economic slowdown and revive long term interest in its stock markets. It is early days and few money managers expect a Chinese growth boom anytime soon. But government moves to entice more cash into equities and jolt consumer spending have boosted the appeal of still-low Chinese company valuations, said investors at groups overseeing more than $1.5 trillion of client funds between them.”We’re going to be very disciplined but in aggregate we feel there’s more upside than downside,” said Gabriel Sacks, emerging market portfolio manager at Abrdn, which manages 506 billion pounds ($677 billion) of assets. He said the group had bought China stocks “selectively” last week and would wait for more detailed policy plans from Beijing following some unusually candid economic support pledges that generated a sharp stock market rally in recent days. China’s factory activity shrank for a fifth straight month and the services sector slowed sharply in September, suggesting Beijing may need to move urgently to meet its 5% 2024 growth target. PAST PEAK PESSIMISM? Long term institutional investors mostly stayed on the sidelines last week as hedge funds sent Chinese stocks surging to cheer a stimulus bonanza, data sent to clients by Goldman Sachs strategist Scott Rubner showed. Mutual funds’ China equity holdings dwindled to 5.1% of portfolios, a decade low, in late August, Rubner said. Chinese consumer confidence has taken hard knocks from a property crisis rooted in President Xi Jinping’s moves to stop a pile of risky real estate debt estimated at more than $1 trillion from growing. Meanwhile, U.S.-China tensions have escalated. But investors reckoned the tide was turning after Beijing authorities promised to spend as necessary to hit the 5% growth target. They also eased some home-buying restrictions, cut bank lending rates and offered brokers cheap funds to buy stocks. “There’s too much of a disconnect between what (Chinese stock) valuations are pricing in and that improving policy narrative,” said Natasha Ebtehadj at Artemis Fund Managers.She added that she had topped up her Chinese equity holdings in the last few days and taken some new positions.RALLY ON? Chinese stocks had their best daily gain since 2008 on Monday but investors cautioned against expecting more such blistering short term moves. “This is a technical, liquidity driven rally,” said George Efstathopoulos, a Singapore-based portfolio manager at Fidelity International, adding it was likely caused in part by short sellers unwinding bets on share price declines. “There probably is a lot of short covering, there’s probably a lot of hedge funds jumping in for short term returns,” Abrdn’s Sacks said. Investors pulled a net $1.4 billion out of greater China equity funds tracked by Lipper so far in 2024, reversing all of the inflows from 2023, a year marked by un-met hopes for a consumer spending surge after strict COVID-19 lockdowns ended. Efstathopoulos said he would wait for Chinese consumer confidence to rise before buying more Chinese stocks. Mark Tinker, chief investment officer at Toscafund Hong Kong, a hedge fund, said Beijing’s latest measures showed China might build sustainable household demand rather than chase quick growth with another property or infrastructure boom.”Growth at 5% is not worth it if all you are doing is encouraging (more) destabilizing leverage,” he said. Luca Paolini, chief strategist at Pictet Asset Management, which oversees more than 260 billion euros ($291 billion) of client funds, said investors may have overlooked prospects of U.S. rate cuts boosting global demand and Chinese exports. The U.S. Federal Reserve on Sept. 18 kicked off a long awaited monetary easing cycle with a hefty 50 basis points rate cut. “What we are telling our clients this week is that if you have nothing (in China) you may want to add some positions,” Paolini added. Noel O’Halloran, chief investment officer of KBI Global Investors, said he began buying Chinese stocks this summer on valuation grounds and would not take profits yet. “In terms of allocations to China, it’s too early for many people to change their allocations but I think the direction can only go one way, which is up.” More

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Annual shop price deflation dropped to 0.6% in the 12 months to September, the BRC said, its weakest since August 2021 and slower than the 0.3% fall in the month before.It was the seventh time in nine months that the pace of price growth has weakened.Non-food deflation fell to 2.1%, a down from a drop of 1.5% in August.”Easing price inflation will certainly be welcomed by consumers, but ongoing geopolitical tensions, climate change, and government-imposed regulatory costs could all reverse this trend,” BRC boss Helen Dickinson, said. Food price inflation rose to 2.3% from 2.0%, an increase Dickinson attributed in part to poor harvests in key farming areas which led to higher prices for cooking oil and sugar.Official figures showed consumer price inflation held at 2.2% for the second month in a row in August, well below a 41-year high of 11.1% in October 2022.But services inflation, a closely watched indicator of underlying inflation pressure by the Bank of England, edged up.The central bank is expected to cut borrowing costs in November after holding its key interest rate at 5% in September.BoE policymaker Megan Green last month said she saw a risk that weak consumer demand could rebound by more than the central bank has anticipated.Consumer surveys have shown many households remain cautious about potential tax hikes in finance minister’s Rachel Reeve’s first annual budget later this month. More

Businesses racing to adopt AI applications like ChatGPT have benefited the companies behind the semiconductors needed to power the technology. AI chip leader Nvidia (NASDAQ:NVDA)’s stock has more than doubled in market value this year and briefly dethroned Microsoft (NASDAQ:MSFT) as the world’s most valuable company.Still, concerns of excessive euphoria around AI-linked stocks prompted some investors to exit the technology sector earlier in the year, and the Cerebras IPO will likely serve as a litmus test for the market’s AI appetite.The Sunnyvale, California-based company did not disclose the terms or size of its offering. Receding recession fears and a strong equities rally have also rejuvenated the U.S. IPO market in 2024 after two lackluster years. Cerebras designs processors for AI training and inference, and builds AI systems to power the processors and feed them data. On Monday, the company revealed total revenue of $78.74 million for the 12 months ended Dec. 31, 2023, up from $24.62 million in 2022. It recorded a net loss of $127.16 million for the same period, compared with a loss of $177.72 million in 2022.Cerebras has been backed by a number of high-profile investors, including the Abu Dhabi Growth Fund and Coatue Management. Citigroup, Barclays, UBS Investment, Wells Fargo Securities and Mizuho are among the underwriters for the offering. Cerebras will list on the Nasdaq Global Market under the symbol “CBRS”. More

Brazilian President Luiz Inacio Lula da Silva is in Mexico as part of an official government visit, which will include his presence in Claudia Sheinbaum’s inauguration ceremony as Mexico’s president on Tuesday.Mexico and Brazil have a trade agreement dated from the early 2000s which sets the exemption or the reduction of imports fees for some 800 types of products. “The growth of our relationship has already topped that agreement,” Marcelo Ebrard, Mexico’s incoming economy minister, said on the sidelines of an event on Monday. “We need to update it,” he added. Earlier in the day at the same event, Lula said that the trade agreements between both countries, which also include a deal regulating trade of vehicles and auto parts, need to be revised as soon as possible. “I want our industries to grow, our agricultures to grow, I want Brazil and Mexico investing to build artificial intelligence that could bring economic benefits for us,” he said in his speech, without providing more details. During the event, Lula also suggested that the trade agreement in discussion between the European Union and South America’s Mercosur bloc could in the future be extended to Latin America. More

Fed Chair Jerome Powell said Monday that the recent half percentage point interest rate cut shouldn’t be interpreted as a sign that future moves will be as aggressive.
“We are not on any preset course,” he told the National Association for Business Economics.
Powell expressed confidence in economic strength and sees inflation continuing to cool.

Federal Reserve Chair Jerome Powell said Monday that the recent half percentage point interest rate cut shouldn’t be interpreted as a sign that future moves will be as aggressive, in fact indicating the next moves will be smaller.
The central bank chief asserted during a speech in Nashville, Tennessee, that he and his colleagues will seek to balance bringing down inflation with supporting the labor market and let the data guide future moves.

“Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course,” he told the National Association for Business Economics in prepared remarks. “The risks are two-sided, and we will continue to make our decisions meeting by meeting.”
Powell did indicate that if the economic data remains consistent, there are likely two more rate cuts coming this year but in smaller, quarter percentage point, increments. That stands in contrast with market expectations for more aggressive easing.
“This is not a committee that feels like it’s in a hurry to cut rates quickly,” he said during a Q&A period following his speech with Morgan Stanley economist Ellen Zentner. “If the economy performs as expected, that would mean two more rate cuts this year, a total of 50 [basis points] more.”
Stocks fell as Powell spoke, with the Dow Jones Industrial Average off more than 150 points. Treasury yields moved higher, with the benchmark 10-year Treasury note most recently yielding close to 3.8%, up nearly 5 basis points on the session.
The remarks come less than two weeks after the rate-setting Federal Open Market Committee approved the half percentage point, or 50 basis points, reduction in the Fed’s key overnight borrowing rate. A basis point equals 0.01%.

Though markets had been largely expecting the action, it was unusual in that the Fed historically has only moved in such large increments during events such as the Covid pandemic in 2020 and the global financial crisis in 2008.
The likelihood of another 50 basis points in cuts would be consistent with estimates provided in the FOMC’s “dot plot” indicating individual officials’ assessments of where rates are headed.
Addressing the decision at the Sept. 17-18 meeting, Powell said it reflected policymakers’ belief that it was time for a “recalibration” of policy that better reflected current conditions. Beginning in March 2022, the Fed began fighting surging inflation; policymakers of late have shifted their attention to a labor market that Powell characterized as “solid” though it has “clearly cooled over the last year.”
“That decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in an environment of moderate economic growth and inflation moving sustainably down to our objective,” Powell said.
“We do not believe that we need to see further cooling in labor market conditions to achieve 2 percent inflation,” Powell added.
Futures market pricing is indicating that the Fed is more likely to move cautiously at its Nov. 6-7 meeting and approve a quarter-point reduction. However, traders see the December move as a more aggressive half-point cut.
For his part, Powell expressed confidence in economic strength and sees inflation continuing to cool.
Inflation during August was around 2.2% annually, according to the Fed’s preferred personal consumption expenditures price index released Friday. While that is close to the central bank’s 2% goal, core inflation, which excludes gas and groceries, was still running at a 2.7% pace. Policymakers usually consider core inflation as a better guide for longer-run trends being that food and energy prices are more volatile than many other items.
Perhaps the most stubborn area of inflation has been housing-related costs, which rose another 0.5% in August. However, Powell said he believes the data eventually will catch up with easing prices for rent renewals.
“Housing services inflation continues to decline, but sluggishly,” he said. “The growth rate in rents charged to new tenants remains low. As long as that remains the case, housing services inflation will continue to decline. Broader economic conditions also set the table for further disinflation.”

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