By Jan Faure
Markets rebounded from a weak start to September in what is historically a challenging month for equity markets. The US Federal Reserve’s 50 basis point rate cut plus expectations for a soft-landing lifted investor confidence, while investor sentiment was buoyed after the Chinese government took concrete steps to stimulate its economy.
Chinese policymakers announced a series of major economic stimulus measures aimed at reviving the country's flagging economy. A prolonged property crisis has weighed heavily on the economy and crippled consumer confidence. Policy mistakes, deflationary pressures and demographic trends have raised concerns that China may enter a period of economic stagnation similar to what Japan experienced following its asset bubble collapse in the early nineties.
The measures include broad monetary stimulus as well as property market support. Global stocks with exposure to China, such as luxury goods, vehicle manufacturers and miners, rallied on the news. Equity markets in China and Hong Kong surged higher, with the CSI 300 index and Hang Seng gaining a staggering 21.0% and 17.5% respectively for the month. In Japan, the Nikkei 225 fell 1.9%, weighed down by a strong yen amid expectations that the Bank of Japan will raise interest rates again in the near future.
Equities and bonds advanced after the Federal Reserve delivered a 50 basis point rate cut and emphasized that the US economy remains robust. Wall Street is increasingly confident that the Federal Reserve will be able to engineer a soft landing despite a recent weaking in US jobs data. Fed Chairman Jerome Powell remains confident that positive economic growth will be sustained in the US. The S&P 500 and Nasdaq Composite gained 2.0% and 2.7% respectively for the month.
Fixed income and real estate markets were buoyed by the prospect of lower rates. The Bloomberg Global Aggregate Bond index added 1.7% for the month (+7% for the 3rd quarter) while the S&P Global REIT index rose 3.3% (+16.3% for the 3rd quarter). US headline inflation eased to 2.5% YoY in August from 2.9% the prior month. The continued slowing in inflation has bolstered the case for more aggressive rate cuts.
The European Central Bank delivered its second rate cut for the year in September, taking Eurozone interest rates to 3.5%. Headline inflation in the Eurozone eased to 2.2% YoY in August, the lowest since July 2021, from 2.6% in the previous month. China’s stimulus measures helped European equities turn positive towards the end of the month, with the Euro Stoxx 50 index gaining 0.9% for September (+10.6% YTD).
Economic growth has remained resilient in recent months while inflation has continued to moderate. With major central banks having embarked on an easing cycle, it does create a favourable backdrop for risk assets. For equity investors, an encouraging feature of recent stock market gains has been the broadening out of returns. There is likely to be more volatility ahead, with Middle East tensions and US elections front of mind, but there are positive catalysts for investors to take confidence from.
Table 1: Global Indicators – Local reporting currencies
