Swissquote: China travels & spends more than pre-pandemic

19 februari 2024

The week starts with the soothing news that the Chinese traveled and spent more than they did in the same period of 2019. As such, the Chinese stock markets return from the CNY break on a cheery note; the CSI 300 index in the positive while the Hang Seng index, which rebounded up to 5% since last Wednesday, is slightly grumpier following a moody close in the US last Friday, after the PPI data revealed a surprise in jump in January.

Both the S&P500 and Nasdaq closed the session in the red – even though the kneejerk selloff remained relatively soft given how badly last week’s inflation figures darkened the sky regarding the Federal Reserve (Fed) cuts. The US 2-year yield spiked past 4.70% after Friday’s data, the 10-year yield spiked past the 4.30%. The expectation of a May rate cut fell to around 35% from almost certain before the inflation data.

In summary, the week starts with good news from China, bad news for the Fed doves, and mounting worries that even if the impact of rising energy and shipping costs due to the Red Sea tensions remain limited on inflation, a powerful Chinese comeback may not.

The People’s Bank of China kept its MLF rate unchanged yesterday to avoid putting more pressure on the yuan – and to see the impact of an avalanche of measures announced earlier this year. The path to correction will be bumpy given that the past years’ $7 trillion erased from the Chinese equity markets costed 66 Chinee companies their place in the MSCI’s global indices.

The MSCI removed 66 Chinese companies from its MSCI China and MSCI world index in its latest quarterly review. Therefore, betting on Chinese market recovery is still swimming against the tide, until the winds turn. But resurfacing risk of a China boost on inflation is brought back on the table, with one major implication: delaying the first rate cuts from the major central banks.

Interestingly, despite last week’s inflation disappointment and tumbling Fed cut expectations, the US dollar index’s failure to gather positive momentum is weighing on the bullish sentiment this morning, the index is testing the 100-DMA to the downside. The EURUSD tests its own 100-DMA resistance to the upside, as the USDJPY trades near 150 at the start of the week.

Japan entering recession in the second half of the year doesn’t help keeping the Bank of Japan (BoJ) hawks motivated. On the contrary, the BoJ has no interest in exiting the negative rates if inflation doesn’t press and if the economy gives signs that it needs support. The yen’s weakness is a major appetite booster when it comes to the Japanese stocks.

The chances are that the Japanese policymakers will try to hold on to their negative rates as long as they could while keeping the yen depreciation under control. The potential of a further yen selloff remains limited due to the risk of intervention, but the dream of seeing the yen shine this year is gently sailing away.

It will be a slow Monday as US and Canada are closed for holiday. But things will spice up starting from Tuesday. Walmart and Home Depot are due to announce their last quarter earnings on Tuesday and Nvidia will be revealing its much-expected Q4 earnings on Wednesday.

Because the S&P500 is shouldered by a handful of technology stocks that are surfing on the AI wave, Nvidia earnings are perceived as a potential make-or-break moment for the US stock rally. Strong earnings should back the continuation of the S&P500’s rise above 5000, while any misstep should bring investors to take profit at the actual levels and trigger a downside correction.

Nvidia is expected to announce $20bn sales in Q4, up from $18bn the company announced a quarter earlier. That represents a more than 200% sales growth compared to the same period a year ago. But the stock performance is also mind-blowing. Nvidia’s stock price was almost multiplied by 7 since the beginning of last year. Nvidia surpassed Google and Amazon last week in terms of market capitalization and became the S&P500’s third biggest company.

The rally could hardly extend exponentially if the sales growth takes a sit on a more reasonable ground – the basecase scerio for the coming quarters. If that’s the, if Nvidia can’t throw another layer of surprise and amazement in the party, we should also see the US stock markets go into a take profit / correction mode.

But investors will continue to look for AI opportunities in every corner of the market. Last Friday, Applied Materials – a semiconductor equipment maker – saw its stock price jump more than 6% following a bullish sales forecast for the year. AI is and will remain the major theme of the year.