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The Paris Bourse trimmed some of its gains at the end of the session (in the wake of an uninspiring Wall Street), but clearly remains the main beneficiary of the Chinese stimulus plan – which is boosting the luxury goods sector – with the CAC40 gaining +1.28% and surpassing 7,600Pts (in volumes twice as high as the previous day, thanks to a rush on L’Oréal, Kering, Hermès and LVMH).
For the record, the CAC has rebounded by more than 5% since its annual low on September 6, buoyed by rate cuts by both the European Central Bank (ECB) and the US Federal Reserve.
Euphoria has subsided a little since Wall Street opened: up symbolically around 3.30pm, US indices remain hesitant and the Nasdaq is just holding its own.
Note, however, the Dow Jones’ new all-time high of 42,284pts and the S&P500’s re-test of its zenith (around 5,727).
The -good- surprise of the day came from the Chinese government’s introduction of a series of measures designed to support the economy, real estate and financial markets, which led to a +4% surge in Chinese and Hong Kong indices (the CSI index of large caps in mainland China gained over 3.7%).
Overnight, Beijing unveiled a series of initiatives ranging from lower mortgage rates for existing home loans ($5.000 billion) to a forthcoming reduction in the reserve requirement ratio (which allows banks to lend more).
China’s central bank is also planning to create new monetary policy tools to support the stock market and encourage funds to flow into the capital markets.
On Wall Street, the “number of the day” is the Conference Board’s consumer confidence index: against all expectations, US consumer confidence worsened in September, according to the monthly survey by the Conference Board, a business organization, on Tuesday, reinforcing the scenario of a slowdown in US economic activity.
Its confidence index fell to 98.7, down from 105.6 in August, while economists were expecting it to improve to 104, after 103.3 in the first reading.
This is the sharpest decline in three years.
The sub-index measuring Americans’ assessment of their current situation fell by 10.3 points to 124.3, while the sub-index measuring their expectations dropped by 4.6 points to 81.7.
ConfBoard points out, however, that the latter remains above the 80-point threshold, a level below which a recession is potentially on the way.
In Europe, investors this morning took note of the Ifo business climate index for Germany. It fell from 86.6 in August to 85.4 in September, a level below the consensus (86.1) according to Capital Economics, but close to its own forecast (85.5).
The trend was also held back by a bout of nervousness in the bond compartment, with 10-year paper flirting with the 3.80% threshold yesterday.
While the Fed’s decision to “strike hard” by cutting rates by 50 basis points last week boosted stock markets, they would need a further “strong gesture” to go higher.
And this is precisely one of the scenarios that is making its way up Wall Street: the Fed, which has said it is “dependent on economic data”, could cut rates by another 50 basis points in early November if employment deteriorates.
For Christopher Dembik, Investment Strategy Consultant at Pictet AM, the current bullish momentum simply illustrates the fact that fresh money is now flowing into equities.
“As anticipated, capital invested in money market funds is gradually starting to be allocated to the equity market, in search of higher returns”, he explains.
According to Bloomberg, $20 billion flowed out of money-market funds last week”, continues the strategist.
“This is a weekly level not seen since June”, he adds.
“This fundamental movement should continue over the coming months, supporting the bullish momentum in equities”, concludes Pictet’s strategist.
This was reflected in the +10Pts pressure on the ’10-year’ last week, and +7Pts on Monday morning.
Cheap redemptions were triggered yesterday, and T-Bonds ended up yielding just +2pts.
On Tuesday, ‘2034’ T-Bonds added +0.6pts to 3.7460%, while the ’30yr’ added +2.pts to 4.105%.
In Europe, our OATs eased symmetrically by -4.7pts to 2.905%, Bunds by -4pts to 2.13%: that’s a spread of 78pts…. which has risen by +3Pts since the formation of the new government: nothing very significant.
The Dollar weakens by -3%, the Euro climbs by +0.3% to $1.115, Gold sets a new record at $2,647/Oz.
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