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1 Oct 2024 | 5 minutes to read
China’s central bank announced a series of measures last week designed to improve economic growth, confidence in the property and stock markets, and arrest deflation. Policymakers cut banks’ reserve requirement ratio (a capital buffer they are required to hold) by 0.5% - potentially releasing around one trillion yuan (approx. USD140 billion) of liquidity - while they also cut a key interest rate by 0.2%, and reduced rates on existing mortgages.
The minimum down-payment for second home buyers will be relaxed from 25% to 15%, levelling it with the requirement for first time buyers. President Xi appears to have relaxed his mantra that ‘property is for living and not for speculation’.
Policymakers also introduced a novel tool to revive stock markets: providing listed companies with liquidity to buy-back their own shares, and permitting them to pledge more diverse assets – including ETFs – as collateral for borrowing from the central bank. The languishing Chinese stock market surged on the news and posted the best weekly return for 15 years; the 10-year government bond yield has settled at c.2.1% after falling from c.2.5% last January. It is debatable whether the 10-year has found a new floor or whether the equity rally can sustain itself.
These decisive measures may pep up an economy facing many domestic and geopolitical challenges and perhaps offset global weakness elsewhere: Germany’s economy is set to contract, European PMIs (purchasing managers’ indices) have weakened and trade wars loom with key counterparts. Whether the measures alleviate social tension in China remains to be seen. However, China will still likely undershoot its self-declared 5% GDP growth target for 2024.
Gold has been the standout asset in 2024, gaining nearly 29% thus far, putting it on track for its biggest annual rise since 2010. The precious metal peaked at USD 2,685 per ounce last week after repeatedly posting record highs this year.
Strong physical demand from China, India and other central banks globally has supported the gold price over the past two years.
Notably, India imported a record USD 10 billion of gold in August after policymakers halved its import duties in July. This tax cut stimulated demand, with imports rising by 140 tonnes, three times more than in July. Demand for jewellery, coins and ingots rose sharply after the concession, with strong interest ahead of the festive and wedding seasons. At the same time, the Reserve Bank of India (RBI) continues to accumulate gold reserves, in response to political and economic factors, notably the decline in confidence in the US dollar.
We expect gold to extend its record-breaking rally towards 2025, not least because of a notable revival of large inflows into gold exchange-traded funds (ETFs). Funds had been flowing out of gold ETFs for much of the past two years. Elsewhere, expectations of interest rate cuts from prominent central banks could also support the gold price.
Gold may be held in some strategies for its safe-haven qualities during times of market volatility and geopolitical tensions.
France’s new government has suggested that the public budget deficit will exceed 6% of Gross Domestic Product (GDP) in 2024, rather than the 5.6% indicated only a couple of weeks ago. This is twice the European Union’s limit, which requires member states to keep budget deficits to less than 3% of economic output. It is a level not seen since the end of the Second World War; worse even than the height of the global financial crisis in 2008 and the Covid-19 pandemic in 2020-21.
Unsurprisingly, this news has not been well received by financial markets. The yield on French Government 10-year debt has risen above the equivalent Spanish 10-year sovereign bond issue; while the 5-year yield has risen above that of Greece. The French government is now effectively being penalised for its fiscal largesse by being forced to borrow at a higher rate than Greece or Spain. Jarringly, financial markets currently have more confidence in Greece’s ability to manage its debt over the medium term, a country that effectively went bankrupt 15 years ago. The annual cost of simply servicing France’s public debt is set to exceed 50 billion euros by end of 2024.
The wider budget deficit is mainly due to the new French government inheriting a far worse fiscal situation than anticipated, and it is likely to be very difficult for those controlling the purse strings to substantially improve the public finances. The government has not yet published any details of its budget plans, but has said that it will focus its efforts primarily on driving down spending. Political and social tensions may continue to grow as the economic reality bites. The new government will have to pass the 2025 budget with the possibility of a no-confidence vote on the rise.
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