Crispin Murray: What’s driving the market this week?

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

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EQUITY markets remain in good shape with the US Federal Reserve’s put option, combined with China’s stimulus, reducing downside economic risk and supporting market liquidity.

Last week’s US inflation data was a bit stronger than expected, leading to a rise in bond yields and a stronger US dollar.

However, equities continued to rise as the narrative of a soft landing remained on track.

The current debate on rates is more about how far below 4 per cent they will go, rather than whether we will see a series of cuts in the next few meetings.

The S&P/ASX 300 rose 0.83% last week and the S&P 500 was up 1.13% in the US.

Equity market gains have come despite the CBOE Volatility Index (the “VIX”) rising above 20, after hovering between 10 and 15 for most of the past year.

This reflects the upcoming US election, which the market sees as unpredictable, though not necessarily a negative.

China’s updates on stimulus have lacked detail and indicate the initial market reaction was overstated. This led to a retracement in commodities and Chinese equities.

US earnings have just started with good results from Wells Fargo and JP Morgan.

The Australian market was quiet last week.

We saw Arcadian Lithium (LTM) agree to a takeover offer from Rio Tinto (RIO), but the bid is quite unique in nature and unlikely to herald a wave of M&A in the sector.

US soft landing watch

US September CPI data was slightly stronger than expected.

The headline figure rose +0.18% month-on-month and 2.4% year-on-year which is a three-year low.

However, core CPI rose 0.31% monthly, taking the yearly gain to 3.3% (up from 3.2% in the previous month).

• Core goods rose +0.17% – the most since May 2023, though it’s still down 1.2% on a three-month annualised basis.
• Core services (excluding rent and owner’s equivalent rent, ie “super-core”) were up 0.4% monthly – the highest since April. Medical care, apparel, auto insurance and airfares drove the increase.

The market’s reaction was muted; the numbers have been surprising on the downside for some time, so there was room for slightly higher numbers.

In addition, the Fed is saying it’s comfortable with the trend and not focused on these “super core” measures.

The upshot was bond yields continuing to move higher. It also reinforced the view that the next two moves by the Fed should be 25bp cuts. 

Jobless claims have become the most-tracked weekly indicator as the market watches for signs of economic deterioration.

Concerns here had subsided. The data spiked higher last week, though this was tied to hurricanes Helene and Milton as well as US port strikes, so shouldn’t be interpreted as a concerning signal.

It does highlight that we are set for a couple of months of messy data because of the two hurricanes.

In aggregate the US economy looks to be holding up well. The Atlanta GDPNow indicator is running at 3.2% for Q3, well above consensus of 2% growth.

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China stimulus watch

A meeting of China’s policy-implementation body, the National Development and Reform Commission, disappointed a market craving a big, headline stimulus announcement.

The only number mentioned was RMB200 billion, versus hopes of RMB3 trillion-plus.

It was more water pistol than bazooka.

This should have been expected given the commission’s role is to implement certain policies rather than determine them.

This was interpreted as a signal that the Chinese government saw reaction to the stimulus as overly dramatic and was looking to cool expectations and speculative activity.

An extreme example was Hong Kong-listed, Chinese residential property developer Vanke, which rose 360% from HKD3.90 to about HKD14 in two weeks, before retracing to HKD7.31.

On Saturday, the more-important Ministry of Finance outlined its plans, flagging:

• No near-term plans for additional central government bond issuance (though the National People’s Congress could choose to do this later in the month).

• RMB400 billion additional local government bond issuance which utilises the gap between debt ceiling and debt outstanding.

• A big one-off increase in debt quota to enable the swap of local government debt. No specific number was given, but last year they did RMB2.2 trillion. It could be above RMB3 trillion, supporting financial stability and helping overall economic activity by enabling local governments to pay wages and maintain services.

• RMB 2.3 trillion available for use by the end of 2024, from bonds already issued but unused under the existing target. The target is unchanged – the key question is whether it can all be used.

• Local governments will be able to use proceeds of their special bond issuance to buy unsold apartments and convert them to affordable housing to help address excess housing inventory.

• Injection of tier-one capital into state-owned banks. There was no specific number, but around RMB 1 trillion is expected.

• Indications the 2025 fiscal deficit could be more than 3% GDP, supporting more spending next year.

The market’s reaction will be interesting. Key points to note include:

• There is no “bazooka-stimulus” headline number, especially compared with the reaction to the GFC which was cumulatively the equivalent of about RMB 20 trillion today in terms of proportion of the GDP. So there is no short-term upside surprise. Bulls could choose to point to the use of existing funds and remaining bond issuance to conclude around RMB 3 trillion of stimulus. But this looks like a degree of re-badging – not new funds – so we remain hostage to how this money will actually be spent.

• The policy is designed to reduce tail risks and prevent the doom loop of local governments continuing to cut back on spending.

• No direct boost to consumer spending. This is negative.

These measures may help prop up the equity market. But it’s unclear if this is sufficient to support commodity markets, which need to see real demand stimulated in the short term.

China’s Politburo and National People’s Congress both meet in late October. The latter would need to approve any policy requiring higher deficit spending.

One final observation: Beijing may be holding something in reserve against the risk of a Trump victory in the US election and the risk of material tariff increases.

US election watch

With barely three weeks to go, Trump gained some momentum in the betting odds last week, moving to a 54% chance of a win (according to RCP Betting Average) versus 46% for Harris.

This is his biggest lead since Harris entered the race.

The seven key battleground states (assuming Minnesota goes Democrat) are Arizona, Nevada, Wisconsin, Michigan, Pennsylvania, North Carolina and Georgia.

Most recent polls have Trump in front in all but Wisconsin, though with a very fine margin.

Market volatility has picked up, but the forward curve has this falling back post-election. To date, this has not impacted equities and is supported by credit spreads staying low.

The most likely election outcome is a Democrat or Republican presidential win without sweeping both the House and Congress – and hence being constrained in what they can achieve.

The main difference in market impact relates to bonds, with Trump’s threat of higher tariffs and less immigration potentially leading to higher inflation in late 2025, and therefore to higher yields.

This may have limited impact on equities as it could be seen to come with higher growth.

Oil watch

The latest expectation is that the US will seek to limit Iran’s ability to export oil with sanctions (and a crack-down on attempts to break them).

Saudi Arabia may step up to increase production to fill the supply gap, allowing them to re-take share and ensure oil prices don’t run up into the year’s end.

These measures may encourage Israel to avoid escalation, but the response still waits to be seen.

Markets

Despite geopolitical uncertainty, the outlook for equities is positive. Inflation is under control, economic growth is solid, financial conditions are easing and corporate earnings are growing.

Initial US results out last Friday were well received in the financial sector with JP Morgan (+4.4%), BlackRock (+3.6%) and Wells Fargo (+5.6%) all beating consensus.

The US market is seeing leadership from industrials, consumer discretionary and financial stocks and less reliance on the Magnificent 7 tech stocks, which is a positive signal.

It is also worth noting the US software index broke to new highs having been range-bound for the whole year.

Australia reflected these themes last week with banks beginning to bounce after a recent fall. The slower trajectory of rate cuts helps them.

Tech also had a good week, as did industrials.

From a portfolio perspective we tend to be overweight technology and industrials and we have added to discretionary exposure.

About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

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