The potential inflation dangers of China stimulus and geopolitics

Equities 4 minutes to read
Peter Garnry

Chief Investment Strategist

Key points

  • Chinese equities and stimulus: Chinese equities have surged 33% since September due to stimulus, but long-term growth concerns persist, with Chinese stocks underperforming globally for 14 years.

  • Commodities and inflation risks: China’s stimulus and Middle East tensions are pushing up commodity prices, raising concerns about prolonged inflation and challenging expectations of U.S. rate cuts.

  • Sector trends – utilities and real estate: Utilities and real estate, benefiting from interest rate sensitivity, lead the market, especially in nuclear power, which is gaining investor attention.

  • Focus on AI in Q3 earnings: The upcoming Q3 earnings season will focus on AI, with technology companies' spending on AI being a key point, alongside broader investor confidence in earnings growth.

  • Upcoming economic data: Key reports include U.S. inflation, Q3 earnings (PepsiCo, JPMorgan), and consumer sentiment, with inflation expectations remaining higher than market pricing.

Are China stimulus and geopolitics going to push inflation higher?

Chinese equities have gained another 10% this week pushing gains to 33% since the lows in September as the Chinese government has pulled out the stimulus bazooka. As we argued in our equity update last week there are good reasons tactically to jump on the Chinese rally, but for longer term investors there are still fundamental questions about China’s growth model that are too uncertain. As a result we are still sceptical of this Chinese rally. Investors should not forget that Chinese equities have underperformed MSCI World for 14 years now.

China’s stimulus was already bidding up commodity prices, but the events in the Middle East have added to the pressure. Biden’s comments yesterday that Israel may target Iran’s oil assets in its retaliation move lifted crude oil by 5%. The Bloomberg Commodity Spot Index is now up 10% from the lows in August and if commodities continue to surge beyond the highs from mid-May then spot commodity prices are suddenly in territory not seen since early 2023. Chinese stimulus and Middle East tensions could be the exact cocktail will cause inflation to linger for longer and prove the market’s current expectations of six US rate cuts by June next year to be too optimistic.

Bloomberg Commodity Spot Index | Source: Bloomberg

Utilities and real estate are the big proxy bond trades in equities

Utilities and real estate have been the two best sectors in the third quarter as investors are rotating into these two sectors as they both represent the highest sensitivity to falling interest rates. Utilities have the added benefit of being part of the AI boom through higher demand for electricity driven by AI data center construction. Within utilities we have seen an even bigger move in those US utilities with exposure to nuclear power. Constellation Energy that recently signed an agreement to refurbish and reactivate the old Three Mile nuclear power plant in a partnership with Microsoft has seen massive change in investor demand. What is odd about the move in nuclear related utility stocks is that sell-side analysts have not meaningfully lifted their expectations for revenue growth. So either investors are seeing something that analysts are not, or else a bubble like dynamic is evolving in US utilities.

Q3 earnings season is all about AI

We will only do a minor teaser of the Q3 earnings season today, so you will have to have wait for the bigger thoughts next Friday. Earnings estimates on the S&P 500 Index have continued to increase with the 12-month forward EPS estimate up 9.5% this year. With the S&P 500 Index up almost twice that this year has been a year of earnings multiple expansion indicating that investors have grown more confident about the outlook. This also aligns well with our recent risk-on outlook presented in our quarterly outlook – read our macro outlook and equity outlook for more insights.

As the chart below shows, the revenue growth in the US technology sector continues to outpace that of the general market and especially Europe. This only means that this earnings season will once again be all about technology earnings and especially evolving around the AI theme. Last earnings season the AI capital expenditures theme, the question of whether Microsoft and Google can continue to spend as much as they do on AI chips, was the main reason why technology stocks started declining in July. This question will be key again in the upcoming earnings season.

The week ahead: Q3 earnings season, US inflation, and US consumer sentiment

  • Earnings: The Q3 earnings season kicks off with the key earnings to watch being PepsiCo (Tue), Delta Air Lines (Thu), JPMorgan Chase (Fri), and Wells Fargo (Fri). Investors will watch the loan provisions that JPMorgan and Wells Fargo are setting aside as important signals on credit markets and then of course reading their outlook for the US economy. PepsiCo is expected to report a meagre 1.5% YoY revenue growth highlighting the continuing impact on many consumer staples categories. Another question is whether obesity drugs are beginning to impact the results of these companies including PepsiCo.

  • US inflation: The US September inflation report is out Thursday and is expected unchanged core inflation at 3.2% YoY while the headline inflation figure is expected to drop to 2.3% YoY down from 2.5% YoY in August. The various core measures are the key to observe. The US services core inflation is still running at around the 4% annualised level so inflation can quickly flare up again if commodity prices continue to rise. The inflation report will also be critical for setting expectations ahead of the FOMC rate decision meeting on 7 November. The market is currently pricing one rate cut of 25 bps, but it has moved in the direction of 50 bps.

  • US consumer sentiment: On Friday the US October preliminary University of Michigan consumer sentiment is being released with expectations at 70.0 vs 70.1 in September. US consumer sentiment has improved over the previous two months and significantly since the low point in June 2022 when consensus was expecting a recession to start in 2023. While the headline figure is important the sub-report on consumers’ 5-10 year inflation expectations is also interesting as consumers expect long-term inflation at 3.1% annualised which is far above market pricing at around 2.4%.

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.