Chinese equities are seeing high volatility, as markets swing between anticipation and disappointment over China’s fiscal support. The CSI300 fell by 7% yesterday, after a meeting by the National Development and Reform Commission (NDRC) offered no details on fiscal spending. Nevertheless, the boost to sentiment from the slew of Sep policy announcements should not be discounted, and Chinese stocks are still over 20% higher despite yesterday’s losses. Finance Minister Lan will hold a briefing on fiscal policy this Saturday, and Chinese market volatility could continue for now. USD/CNH had bounced to 7.09 amid equity volatility, which is unsurprising given over USD9bn of inflows to US-listed Chinese equity ETFs on hopes of the efficacy of Chinese stimulus. We expect RMB gains on policy stimulus to be gradual given a still fragile economic outlook, and high uncertainty with regards to external trade and tariffs. Last Friday, the EU has voted to formally enact tariffs on Chinese EV imports, and China had also announced anti-dumping measures on EU brandy in response.
The USD’s near-term direction will hinge on US CPI tonight, especially after markets were wrong-footed by strength in non-farm payrolls. Consensus expects inflation to ease to 2.3% y/y, and a downside surprise could see the DXY index easing back towards 102. Fed rate cut expectations have already been trimmed to just two more 25bps cuts for the rest of the year. The Sep FOMC minutes released overnight indicate that some attendees believe that a 25bps cut would be more appropriate, although only Bowman voted against a 50bps cut.
USD/JPY had rebounded towards 149, with PM Ishiba dissolving the Lower House yesterday for elections on 27 Oct. New Japanese Finance Minister Kato had warned on Tuesday of the negative impact of sudden JPY moves, underscoring a discomfort with renewed JPY weakness. With speculative positioning still not deeply short, intervention does not appear to be an imminent risk, and USD/JPY could remain sensitive to US rates for now.
USD/KRW had bounced towards 1350, reaching its highest since mid-August. FTSE Russell’s announcement yesterday that it would include Korean government bonds into its World Government Bond Index is a positive and could eventually draw USD60bn of inflows. However, as the change will only be implemented in Sep 2025, there may not be a large short-term boost for the KRW. Markets will instead focus on the BOK meeting tomorrow, where the Bank is expected to begin its rate cut cycle.
Quote of the Day
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October 10 in history
The Nobel Memorial Prize in Economic Sciences was awarded to Ben Bernanke, Douglas Diamond, and Philip Dvgvig in 2022.
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