The Panda strikes back

China launches a massive stimulus programme
Middle East tensions push the oil higher
Bond yields jump back

Over the month of October, the financial markets have largely continued trading in the cautiously optimistic mood, as if waiting for the substantial catalysts to liven up the general action. No significant spikes in volatility have been recorded as the market may have waited for some clarity in the upcoming US elections on November 5th.

As a result, developed markets’ equities (measured by MSCI World index) have risen by 0.76%, while emerging markets’ equities (measured by MSCI Emerging Market index) have declined 1.77%. During the same period yields on bonds have jumped, with 10‑year US Treasury bond yields increasing to 4.28% from 3.79% a month ago, while German 10‑year Treasury bond yields have risen to 2.4% from 2.12% a month ago.

China’s stimulus plan

In response to lagging economic growth and relatively low consumer confidence in recent months and years, Chinese officials have long been urged to step up their efforts. The example of this materializing could already be noted in late September, when China’s central bank (PBOC) have announced a series of stimulative measures meant to prop up the economic activity. Among others, interest rates on outstanding mortgages were reduced, as well as additional measures to alleviate the slow‑moving real estate crisis were announced. However, this time around some stock market focused measures were announced, too. Namely, public officials have announced increased commitment to funding stock repurchases and similar measures aimed at raising equity prices. The financial market participants have greeted these news with great deal of optimism and raised the benchmark of Chinese equities CSI 300 by over 30%, later retreating some of that move. While analysts in general have doubts whether the announced measures are going to stimulate the economy enough, investors are obviously happy to jump on the rare opportunity of alleged bullish case in the Chinese stock market.

Shanghai Shenzhen CSI 300 Index

Source: Investing.com

Oil stays volatile on the back of Middle East tensions

With October 7th marking the one‑year anniversary of what started as a renewed Israel‑Hamas conflict, the calming down of tensions in the region could not be further from the truth. Now with attention shifting to the north, Israel had been raising pressure on the Lebanon‑positioned Hezbollah with multiple measures and eventual ground offence during the late September and throughout October. In response, Iran launched already a second missile strike on Israel this year, thus raising the odds of the conflict turning into an all‑out war between the major powers in the region. The remarks of the US president Joe Biden that Iranian oil facilities could come under Israeli retaliation attack has spooked the oil traders, who have quickly pushed up the price of the black gold over 81 USD/bbl, ~15% above the recent lows of ~70 USD/bbl. As the month of October dragged on and all‑out war fears receded again, the Brent crude oil has trended down to ~73 USD/bbl.

This rising price of oil would come at odds with the current reality of the global economy. Thanks to sluggish growth globally, International Energy Agency has announced it forecasts the global demand for oil would only grow by less than 900 000 barrels per day in 2024 and ~1m barrels per day in 2025. The pace of such growth is only a half of the pace recorded in 2022 and 2023 and will drag the oil price down, other things equal.

Yields come back higher again

The bond yields’ story during the last year has seemed like a never‑ending drama. Having started 2024 with an ultra‑aggressive interest rate cut expectations and 10‑year US Treasury bond yield hoovering around the 3.80% level, financial markets have swiftly reshuffled their expectations by trading the bonds down and raising corresponding yield to this year’s highs of over 4.60% by April. Ever since, the disinflationary trend has convinced the markets once again on the imminent change in the interest rate cycle, which was reaffirmed by three interest rate cuts by ECB (European Central Bank) and a jumbo cut by FED (The Federal Reserve) in September. As a result, the 10‑year US Treasury bond yield has reached a new recent low of just above 3.60% by mid‑September as the financial markets participants got comfortable with the disinflationary trend once again. The tables have turned - again - in early October as the US economy was reported to have added a whooping 254 000 of nonfarm payrolls versus the expected 150 000 figure in September. This may have made some market participants nervous as it obviously shows the US labor market staying surprisingly strong, which could potentially undermine the further interest rate cuts by the FED. Therefore, the yields on a 10‑year Treasury bond have shot up again to over 4.20%, with the rhyming action in the German 10‑year government bond, too.

Market view

One could argue the market participants have been seemingly too pessimistic about the state of the US economy, which makes them a little bit too eager to trade down the bond yields. As the market surprises the investors on the upside and interest rate cut expectations get recalculated, this inevitably leads to sharp moves in the bonds prices, which is echoed in equity valuations, as well. Despite the hiccups, we do believe the medium‑term trend of interest rate easing cycle is intact and we should continue getting the assurances on the disinflationary trends continuing coupled with subdued level of economic activity, in general.

Changes in portfolios

Having performed a general assessment of our investment positioning into the late months of 2024, we amended the portfolios during the month of October. The amendments included slight revision of our equity positions in European as well as Asia Pacific regions, the addition of a thematic REITs’ (Real Estate Investment Trust) position and other technical revisions in the equity part of managed portfolios. The fixed income part of portfolios was mainly revised against the slightly increasing risk appetite – evidenced by slightly lowered allocations towards government and investment grade bonds, while increasing positioning in the high yield and Emerging markets’ bonds.

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