Bonds Strengthen, Equities Fluctuate
In the dynamic and often unpredictable world of finance, the past week has revealed notable shifts within the stock market and the bond market in China. With its rollercoaster trends and fluctuating market sentiments, the performance of major indices sheds light on broader economic conditions and investor attitudes.
Last week, the stock market saw a promising rebound after hitting a noticeable low. Particularly strong openings on Wednesday and Friday signified a surge in investor confidence, leading to substantial gains, with major indices increasing approximately by 2%. Despite some intraday retractions, the overall momentum carried through the week, evidencing a robust trading environment. Interestingly, daily average turnover dipped to 1.52 trillion yuan, following a peak drop to 1.3 trillion yuan on Tuesday. However, as the indices picked up steam, trading volumes began to progressively increase, peaking again at 1.75 trillion yuan on Friday, a level consistent with the previous week.
In examining sector performance, the micro and entrepreneurial indices led the charge with increases exceeding 6%. Sectors traditionally recognized for their consumer-driven dynamics, such as retail, textiles, light industry, and agriculture, made significant strides—likely buoyed by an upcoming critical policy meeting regarding domestic demand. This surge is also attributed to the vibrancy of thematic investments in areas such as supply-chain cooperatives, the millet economy, cross-border e-commerce, digital finance, data factors, and robotics. Notably, textiles, retail, light industry manufacturing, and media saw the highest gains, while defensive sectors such as nonferrous metals, public utilities, and automotive were among the laggards.
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While recent policies aimed at stimulating economic recovery show signs of progress, their long-term effectiveness remains under scrutiny. The financial market’s short-term recovery in volumes indicates a cautious optimism; however, an overarching risk appetite from capital remains subdued. This caution is likely exacerbated as indices approach dense positioning zones, suggesting short-term adjustments might be necessary. Nevertheless, amid these fluctuations, domestic policies aimed at combating deflation remain steadfast—a message that suggests that even with potential short-term setbacks, a bullish sentiment should be maintained for the medium to long term.
On a more localized note, China’s Manufacturing Purchasing Managers' Index (PMI) improved to 50.3% in November, indicating a slight rebound from previous values and remaining stable seasonally. This marks the second consecutive month the index has landed in an expansion zone. The sustained uptrend in manufacturing PMI reflects a broader restorative trend in the economy, corroborated by increasing data from real estate, infrastructure investment, and automotive consumption. The indicators of production, demand (both domestic and international), pricing, and inventory all signal a recovery trajectory, painting a comprehensive picture of the economic landscape.
Internationally, the U.S. core Personal Consumption Expenditures (PCE) price index for October rose by 0.3%, adhering closely to expectations and indicating a stable consumption environment. Notably, the year-on-year core PCE has increased by 2.8%, marking the largest hike since April 2024—an indicator of recovering economic strength yet also pointing to a potential easing in the Federal Reserve’s positioning ahead of the crucial December meeting.
Turning to the bond market, there has been a clear positive shift with long-term bonds showing a robust performance. The peak issuance of local government bond replacements is expected to conclude soon, easing earlier supply pressure concerns and resulting in a general slump in yields. However, uncertainties surrounding the effectiveness of next year's growth stabilization policies and fiscal deficit management contribute to market volatility.
On the ground, high-frequency data reveals a sporadic demand shift. Metrics concerning raw materials indicate weakening support for production alongside a significant dip in cement clinker utilization rates while maintaining a steady average daily production for iron. Conversely, the operating rates for certain downstream products like polyester filament and automotive tires show performance slightly above seasonal trends.
Regarding liquidity and policy moves, the markets have transitioned into a new norm characterized by improved liquidity as the month draws to a close. December is traditionally marked by increased fiscal expenditures, aimed at achieving earlier budget spending goals; subsequently, local governments are likely to ramp up spending. As local governments leverage refinancing-focused bonds, outstanding implicit debts are anticipated to gradually decline, projected to result in a reduction of 1.4 trillion yuan in bank credit over November and December. This strategy of accelerated spending alongside debt repayments offers a favorable outlook on liquidity and banking metrics.
With the prospect of efficient local bond issuance, market stability in interest rates seems plausible. Navigating through the initial phase of concentrated supply, banks may experience liquidity squeezes leading to rises in interest rates. However, as issuance accelerates, the concurrent repayments should ultimately foster a greater liquidity advantage, stabilizing market sentiments. Notably, since the re-pricing of deposits takes an extended timeline, banks' liability costs typically decline at a slower rate, presenting challenges for bond yields. Considering a substantial increment in deposits at the beginning of 2022, attention should be directed towards the first quarter of 2025, when significant amounts of three-year deposits will mature, catalyzing notable re-pricing alignments.
As we approach discussions in early December at the Political Bureau meeting, followed by the Central Economic Work Conference later that month, significant policy directions on fiscal and monetary measures are anticipated, setting the tone for the economy heading into 2024 amidst both domestic potential and global uncertainties.