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When Do You Start to Worry About Chinese Stimulus?

Published 01/25/2024, 02:06 AM
Updated 07/09/2023, 06:31 AM

The stock rally continued on both sides of the Atlantic on Wednesday; the technology and chip stocks remained in the driver's seat. Sentiment in Europe was bolstered by an almost 9% rally in ASML on news that their orders more than tripled last quarter. Now, there is a catch. A third of the $10 billion dollar worth of orders came from China as Chinese companies rushed to buy these machines by the end of last year before the US and Dutch chip ban came into effect. But even if the Chinese demand will fade away, ASML says that it expects its sales to remain steady thanks to AI demand.

As such, the ASML news also boosted the stock prices of our favorite AI plays. Nvidia (NASDAQ:NVDA) hit another record yesterday, TSM extended gains, and Microsoft (NASDAQ:MSFT) was worth $3 trillion for some time. The S&P500 and Nasdaq 100 hit a fresh record, and Netflix (NASDAQ:NFLX) – which has nothing to do with AI, but which was just cheering its 13-mio new subscribers for the latest quarter - jumped 10%.  

In summary, all goes well for those who are in the technology boat sailing north. For the rest, skepticism best describes how they feel about an unsustainable rise in valuations.  

Tesla Misses, Intel Next

Tesla (NASDAQ:TSLA) missed estimates in its latest quarterly earnings report and warned that its EV sales growth will be ‘notably lower’ and that the numbers will suffer until the company comes up with a cheaper model. The series of price cuts wasn’t enough to bolster demand in a way to keep the company smiling and profits rising – sufficiently. As such, Tesla refused to offer a specific growth target and its share price took a 6% hit in the after-hours trading. Intel (NASDAQ:INTC) is due to report its earnings today.  

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Connecting the Dots 

The Chinese are serious about bolstering their economy and they look like they are getting to a place where they are ready to do whatever it takes to reverse the slowing trend. 

In addition to a series of market stimulus news, the People’s Bank of China (PBoC) announced yesterday that it will cut the reserve ratio for the banks by 50bp from February to release more liquidity to bolster stock valuations The latter will free up to an additional trillion yuan, which equals $139bn US dollars

Will it help? Well, we will see. The good news is, if it doesn’t, the Chinese will continue until it does.  

The CSI 300 finally sees some positive reaction, stocks in Hong Kong are up 10% since Monday, American crude is drilling above the $75pb per barrel and copper futures – which are a gauge of global growth – also seem gently convinced that the Chinese will put all their weight – all they need to – to make things better.  

But note that China’s supportive policies may not echo well across the developed markets’ central banks, because the Chinese stimulus – if successful – should boost global inflation and interfere with DM central banks’ plans to loosen policies.

BoC Calls the End of Tightening, ECB Next to Speak

But until we see concrete results from Chinese measures, softer policies remain the base-case scenario for the Federal Reserve (Fed) and the other major central banks (except Japan). In this context, the Bank of Canada (BoC) kept its rates unchanged at yesterday’s meeting and called the end of rate hikes. The European Central Bank (ECB) will meet today and will certainly vehicle the same message - that policy tightening is over. But that’s not enough.

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When it comes to the ECB, what investors want to know is When the ECB will start cutting the interest rates. If we had this conversation two weeks ago, I would say that the ECB would push back on expectations of premature rate cuts. But after having heard Christine Lagarde say that the first-rate cut could come in summer, I am more balanced going into the meeting. Inflation has come lower – but we saw an uptick in the latest figures. The rising shipping costs and the positive pressure in oil prices mean that upside risks prevail. Yet the slowdown in European economies calls for lower rates. Released yesterday, the Eurozone PMI figures showed that aggregate activity remained in the contraction zone for the 8th straight month and slowed down accelerated in January – except for manufacturing.

A hedge fund called Qube apparently built a $1 bn short position against German stocks, and Goldman Sachs says that a Trump presidency would increase risks for European businesses, and economically sensitive pockets of the market, like the German industries, would be the most exposed.

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