China stocks rally tested after stimulus-led gains: Markets wrap

Synopsis

Asian shares rose for the fifth consecutive day, driven by Beijing's support measures. US stocks also hit new highs amid expectations of further rate cuts. Chinese equities saw significant gains following a stimulus package. Investors are closely watching US economic data and Federal Reserve actions for future market direction.

Asian shares gained for a fifth day as a rally sparked by support measures from Beijing continued, while US stocks set fresh highs, with investors preparing for further rate cuts.

Equity benchmarks rose in South Korea and Australia, while those for Japan were mixed after the yen strengthened against the dollar in the prior two sessions. The Golden Dragon index of US-listed Chinese companies rallied 9.1% in New York trading on Tuesday. The moves follow the best day since 2020 for a gauge of mainland equities after China unveiled a sweeping stimulus package to support the economy and financial markets.

“Within Chinese equities, we anticipate near-term support on the stimulus news, contingent on evidence of effective execution,” said Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management. “We expect rate cuts and capital market support to benefit state-owned enterprises concentrated in high-dividend sectors, including utilities, telecoms, energy firms, and financials.”

Effects of the Chinese stimulus measures broadened across Asia, with the regional gauge extending gains after reaching its highest level since February 2022. Australia’s dollar advanced to the highest in 19 months against the greenback ahead of its monthly inflation readings. The offshore yuan rose past 7 for the first time since May 2023.

Support measures unveiled by Chinese authorities Tuesday included interest rate cuts, more cash for banks, bigger incentives to buy homes and plans to consider a stock stabilization fund. However, the efforts may only buy China some time given the scale of challenges facing the economy.

Bloomberg

Treasury yields were little changed after edging lower Tuesday as US data showed signs of fragility in the economy, while an index of greenback strength fell to trade near the lowest level this year. A gauge of emerging market currencies set a fresh record high.

The reading on the Conference Board’s gauge of consumer sentiment posted the biggest drop since August 2021. The report also flagged concerns about a slowdown in the labor market while manufacturing data also came in weaker than expected.

“The decay in the perceptions of jobs available was striking,” according to Carl Weinberg, chief economist at High Frequency Economics. “It also will deliver a warning message about the state of the economy to financial markets.”

Swaps traders increased their wagers to more than three-quarters of a point of policy easing by year-end from the Federal Reserve, suggesting at least one more major US cut is in store, after the data. Investors are awaiting data on the Fed’s preferred price metric and US personal spending later this week for further clues on the depth of future reductions.

Fed Governor Michelle Bowman, the only policymaker to dissent on last week’s half-point cut, said the central bank should lower interest rates at a “measured” pace, in Tuesday comments. She said that inflationary risks remain and that the labor market has not shown significant weakening.

A handful of other policymakers, including Chicago Fed President Austan Goolsbee, have said the focus needs to shift from inflation to jobs. Goolsbee said the central bank may need to cut rates “significantly.”

Oil prices climbed Tuesday on hopes of a stronger Chinese economy and as a major Israeli strike on Hezbollah targets in Lebanon kept tensions high in the Middle East. Gold hit a record trading above $2,662 an ounce.

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