China caution cools sizzling US optimism

A look at the day ahead in Asian and global markets

By Jamie McGeever, Columnist, Global Finance & Markets

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Investors in Asia have their first chance on Monday to react to a batch of key economic indicators and news out of China, and should do so in a relatively bullish frame of mind after the record-setting rally on Wall Street on Friday.

The S&P 500 rose above 6,000 points for the first time, continuing its powerful rally following Donald Trump's victory in the U.S. presidential election on Tuesday and the Federal Reserve's interest rate cut on Thursday.

That sealed a weekly gain of almost 5%, the S&P 500's best week since September 2023. This helped lift the MSCI World equity index to a new high on Friday, too.

Graphics are produced by Reuters.

It is worth recapping how monumental last week was for world markets - the U.S. election and Fed rate cut super-charged risk appetite and the dollar, while investors also navigated a UK rate cut and the collapse of the German government.

The news flow from China was potentially no less significant for investors, although the outlook is not quite as uniformly bullish for local or risk assets. 

China unveiled a 10 trillion yuan ($1.4 trillion) debt package to ease local government financing strains and stabilize flagging economic growth. But this will disappoint investors, who had built up hopes for something special to pre-empt another round of fractious Sino-U.S. tensions and trade barriers.

And on Saturday, official figures showed that inflation in China remains weak, an indication that the economy's revival and path to reflation will be slow and long. 

Producer prices in October slid 2.9% on the year - deeper than the 2.8% fall in September, below an expected 2.5% decline, and the biggest drop in 11 months. Annual consumer price inflation slowed to 0.3% from 0.4%, the slowest in four months.

While investor sentiment globally looks strong, the optimism that exploded around China in the wake of Beijing's wave of stimulus measures in September is fading. Mainland China saw net outflows for the fourth consecutive week, according to Goldman Sachs. 

SocGen analysts advise caution on China, noting that the risk of higher U.S. tariffs on China and other parts of Asia is very real, implying lower growth in Asia and a stronger dollar against Asian currencies. 

They now expect USD/CNY to peak at 7.40 in the second quarter of next year, arguing that China's stimulus measures may not fully compensate for the increased tariff risk. 

The dollar is certainly on a tear. It clocked its sixth weekly gain in a row last week against a basket of major currencies, something not seen since August-September 2023.

Graphics are produced by Reuters.

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