China cuts rate again, as gold reaches another record and the dollar sinks

Another day, another rate cut from China. This time the Chinese authorities cut the 1-year rate by 0.3% to 2%, its largest ever reduction to this rate. This adds to the evidence that this is the PBOC’s ‘whatever it takes’ moment, which could have a lasting effect on China’s financial markets and its economy. China’s stocks are rising once more on Wednesday; however, European futures are taking a breather, and US equity futures are also pointing to a weaker open. However, we continue to think that European shares will welcome the boost to commodity prices and to the increased prospects of a rebound in China’s economy.

China’s stimulus measures took financial markets by storm on Tuesday. Commodities and European stock indices surged, especially miners, luxury goods houses and luxury car makers.  While some are concerned that the Chinese stimulus package will not remedy China’s deflation, there are others who see it as a new era for the Chinese central bank, as it becomes more expansionary and supportive of growth. A Fed rate cut, combined with China stimulus is a powerful force for stocks and other risk assets as we move towards Q4.

Stocks buck the September trend, as Nvidia surges

Stocks usually perform poorly in September, not so this year. The boost to risk sentiment helped the S&P 500 to record its 41^st record high of the year, the Dow also surged. The S&P 500 was led higher by Nvidia, which rose by nearly 4%. Nvidia is becoming a barometer of risk, when risk sentiment is strong, Nvidia tends to rally. Big daily moves are now par for the course for Nvidia as it chases that $3 trillion valuation.

Two dynamics at play in US stock markets

There are two interesting dynamics at work in the blue-chip US stock indices. Firstly, within the Magnificent 7, Nvidia is back leading the pack. This suggests that the skepticism about the future of AI, which led to the tech sell off last month, has been put to bed for now. If AI is once again a powerful investment theme, then US blue chip stock indices should do well. Also, the rally is not only limited to tech. The 493 companies in the S&P 500 who are not part of the Magnificent 7, also reached a record high on Tuesday, along with the Dow Jones Industrial index. The equal weighted S&P 500 is also tracking the market capitalization-weighted index closely, which is another sign that wealth is being shared across sectors at this stage of the risk rally. This could be a sign that there could be further upside to come for US stocks.

Sterling strength

Currencies are also in focus, after GBP/USD rose above $1.34, to its highest level since early 2022. Sterling’s strength is a sign of the diverging paths being taken by the Fed and the BOE right now. On Tuesday, the governor of the Bank of England said in a regional newspaper interview that rates would never return to the extreme lows of recent years. This is to be expected, but it reminded people that the BOE is still willing to take its time on its rate cutting path. Not only does the pound enjoy a large real interest rate differential between the euro and the USD, but the UK economy seems to be faring better, for now. The PMI data in the UK for September, was much better than the Eurozone’s and the UK’s manufacturing sector is also outperforming the US’s manufacturing sector.

More 50bp rate cuts expected from the Fed

US interest rate expectations are also fluctuating with US economic data. In the first half of this week, the focus is likely to be on signs that the Fed is behind the curve when it comes to cutting rates. For example, the Conference Board’s measure of consumer confidence plunged for this month. The Fed Funds futures market reacted to this data and is now pricing in a 56.1% chance of another 50bp rate cut in November. This was almost unthinkable a week ago when expectations of a 50bp rate cut were less than 30%. New home sales data for the US is released later today and this could add to the pressure on the Fed Funds rate. The market is expecting new home sales to plunge by more than 5% for August, which may further boost expectations of a 50bp rate cut.

Will the PCE data disrupt the 50bp narrative?

However, US economic data later in the week may threaten the rally in stocks, as it could highlight the inflation risks in the US economy. The core PCE data is released on Friday, and the market expects this index to tick up for August to 2.7% from 2.6%. An upside surprise could see volatility across asset classes and a rapid recalibration in US interest rate cut expectations for the rest of this year. For now, expectations of a 50bp rate cut in November is risk positive and it is boosting the gold price, which made another record high on Wednesday.  

Gold and Silver outlook

XAU/USD is comfortably above $2,600 and is higher by more than 6% so far this month. The gold price could push towards $2,700 if the core PCE data comes in hotter than expected. Interestingly, the silver price is outpacing gains in gold, and it is higher by more than 11% so far in September, although it has not been able to reach the highs from May. Silver has more industrial uses than gold, so its rapid price increase this month is another sign that investors are upbeat about the global economic outlook. We think that China’s stimulus measures may add to the upward pressure on the silver price in the coming weeks.

Will Sweden pave the way for an October rate cut from the ECB?

Elsewhere, it is worth watching the Swedish Riksbank, who announce their policy decision at 0830 BST today. The market expects a 0.25% cut in interest rates. If they do cut, then this would be the fourth cut so far this year, and the second consecutive cut. The Riksbank’s decision is important since the Swedish economy tends to be a good leading indicator for Europe’s economy. Sweden’s GDP plunged in July, and inflation also fell below the target rate, which has precipitated the rate cut. Thus, if the Riksbank does cut rates, we could see expectations rise that the ECB will cut rates again in October. Currently there is a 60% chance of a cut priced in by the market, we expect this to rise further in the coming weeks, as the economic signals continue to look bleak. This could weigh on the euro, which is one of the weaker G10 FX currencies this week, although EUR/USD is in recovery mode and is also back at its highest level since 2022, as the USD falls across the board.