Market Report.
📉 China lowered its one-year and five-year loan prime rates (LPRs) by 25 basis points each to 3.1% and 3.6% respectively. The cut was expected and had been signaled by the central bank governor the previous Friday. The governor also indicated the reserve requirement ratio could be cut by 25-50bps by year-end depending on liquidity. Real interest rates in China are still seen as too high and more cuts are expected next year as US rates decline. Last month saw a 50bps RRR cut amid various measures to support the economy facing property and consumer weakness. China surprised in July by cutting its major short and long term lending rates.
📈 Friday saw an 11% increase in Netflix shares, one day after the firm revealed third-quarter profits, sales, and paid membership figures that above projections. One of the highlights of Netflix’s report was the expansion of its ad-supported membership. That category of subscribers accounted for 50% of new sign-ups and saw a 35% increase over the quarter.
⚠️ More on the downside risks to the euro after last week’s rate cut. Lagarde warned any trade barriers would pose a “downside risk” to Europe’s struggling economy. The ECB cut rates further and more aggressive reductions are expected. The risk of the euro falling to parity with the dollar is mounting due to this week’s ECB interest rate cut and the threat of a Trump presidency sparking a global trade war. Europe is sensitive to foreign policy shifts and broad Trump tariffs could damage its lackluster economy further. Money markets imply a 20% chance of a 50bps ECB cut in December and full pricing of 25bps cuts through April 2025. Deutsche Bank says an escalating US-China trade war would drive more aggressive ECB rate cuts than expected.
💡 Do you remember when in the last report we pointed out that Europe’s inflation is not falling because of the effectiveness of monetary policy but because of the collapse of its economy (contraction of demand) which poses deflationary risks? Well, it seems that ECB policymaker Gediminas Simkus, the Lithuanian central bank governor, agrees with us. ‘If the disinflation processes get entrenched… it’s possible that rates will be lower than the natural level of 2% to 3%’ he said.
📉 In fact, Germany’s PPI data once again presents deflationary risks. It has plunged by -0.5% more than twice as much as expected and moved into negative territory after the last period with 0.2%.
🌍 This week is the BRICS Summit to be held in Russia. Paradoxically, the IMF and the World Bank warned today in Reuters of the worrying increase in the proportion of international payments from developing countries to China, and the growing distrust of Western institutions. The world is shifting its axis of power.
📊 The BOJ concludes its two-day policy meeting on Oct 31, days after Japan’s general election where new PM Shigeru Ishiba faces a test. The BOJ is widely expected to keep rates steady at 0.25% as Governor Ueda has stressed scrutinizing risks like volatile markets around big political events. The quarterly report and Ueda’s briefing may offer clues on the next rate hike timing if forecasts show inflation around 2% through 2027. Increased optimism over sustained wage hikes could signal the next hike is nearing while warning over risks could diminish a year-end hike chance. The next hike may come in March 2025 but the road may be bumpy due to slowing global demand discouraging big pay hikes.
Market View:
📈 Markets remain calm on levels. Mini SP500 futures remain close to 5900 points, currently trading at 5885. The Nasdaq 100, after reaching 20,500 points 10 days ago, is currently trading at 20,215 points.
📈 The dollar index continues to strengthen, reaching 104 points last week, after which it fell back to 103.65 points. The euro-dollar, which lost the 1.0850 level on Friday, has managed to regain levels and is trying to stay above this zone. The US 2-year bond is still close to 4% yield, a 50 basis point rise from September levels.
📉 The European market, after the highs reached last Friday, sees the DAX 40 falling to 19,500 points and the Eurostoxx 50 losing 5000 points, now trading at 4940 points.
🛢️ Crude oil rallies back towards the $74.50 per barrel Brent. Gold hits a new record high at $2750 an ounce, and bitcoin broke above $69,000 a few hours ago, now retreating towards the $68,170 area.
Geopolitics:
🔍 The US is investigating a leak of intelligence documents about Israel’s plans to attack Iran. The New York Times reported that US officials acknowledged the documents were authentic. The documents outline Israel’s operational plans to attack Iranian nuclear sites and include information about a secret multibillion-dollar US-Israel arms deal. The documents included details on Israeli strikes on Lebanon during its 2006 war with Hezbollah.
🤝 Turkish-German defence cooperation is bouncing back despite past tensions between Turkey and Greece. German Chancellor Olaf Scholz promised Turkey more defence exports during a visit to Istanbul. Germany is one of Turkey’s most important partners in defence projects like the sale of Leopard 2 tanks. Turkey wants greater technology transfer and joint production with Germany in its national arms programs. Ankara remains an important NATO ally bordering conflict zones like Syria.
📈 Stanley Druckenmiller, a former Soros fund manager, believes that markets are discounting a Trump victory. He also believes that if Trump wins, he will have a tougher Fed that could even raise rates, and if he loses, markets will turn bearish on Kamala.
