The recent activities in the stock market have sparked significant interest and conversation among investors and analysts alike. Last week witnessed a promising rebound in the major indices, notably returning from a dip early on Wednesday to achieve impressive gains by Friday. Despite some intraday pullbacks, the composite index marked an overall increase, pushing the three major indices upwards by nearly 2%. Average daily trading volume across the A-share market dipped to around 1.52 trillion CNY, a notable drop from previous highs, yet the volumes started to recover towards the end of the week, signifying a potential return to investor confidence.
Among the indices, the Micro Index took the lead with a robust surge exceeding 6%. The Double Innovation and Small Cap benchmarks also reported strong increases. In contrast, the North China Index witnessed a decline of over 1%. Analyzing sector performance, consumer-facing segments such as retail, textile, and light industrial goods saw significant rises, potentially influenced by anticipatory positioning ahead of important policy discussions focusing on domestic demand. Themes related to supply and marketing cooperatives, the millet economy, cross-border e-commerce, digital finance, and robotic automation have also surfaced prominently in market discussions, indicating a shift in investment focus. The textile and apparel sectors, trade and retail, light manufacturing, social services, and media showed particularly strong gains, while industries such as non-ferrous metals, public utilities, coal, home appliances, and automotive registered notable losses.
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The effectiveness of previous policies aimed at stimulating economic recovery remains to be fully assessed. Future policy measures are anticipated to undergo validation as market conditions evolve. Although there has been a short-term recovery in trading volumes, investor risk appetite appears to be recovering at a sluggish pace, particularly as indices approach resistance levels associated with higher trading density. Consequently, there might be underlying pressure for adjustments in the equity market during the short term. Nevertheless, the clear turning point in domestic policy and the resolve to overcome deflation suggest that a bullish outlook should continue to be maintained, even with expected short-term oscillations.
On the domestic front, the manufacturing Purchasing Managers' Index (PMI) for November recorded a score of 50.3%, reflecting a continued recovery with an increase of 0.2 points over the last month, slightly surpassing forecasts. This marks the second consecutive month of expansion within the sector. Along with the rebound in the manufacturing PMI, which has now shown three months of consecutive growth, indicators across various segments have also been positive, reinforcing the narrative of a gradual recovery for the economy matched by a spectrum of other high-frequency data points in real estate, infrastructure, and automotive sales.
Internationally, the economic landscape presents a varied picture. In the United States, the Core Personal Consumption Expenditures (PCE) Price Index rose by 0.3% in October, maintaining previous levels. Year-over-year, the Core PCE Price Index recorded an increase of 2.8%, the highest growth since April 2024, aligning with forecasts and previous data. Current figures indicate steady consumption growth and stable employment numbers, while inflation appears to be stabilizing, showcasing robust economic health through the fourth quarter, although the indications remain subdued as preparations for the December interest rate meeting unfold.
Turning to the bond market, it has shown significant strength, particularly in long-duration instruments. The peak issuance of local government debt has reached its conclusion, with the market demonstrating stable acceptance of new bonds. Concerns surrounding supply pressures have waned, leading to a marked decline in yields. Still, uncertainty surrounding future growth policies and budget-related deficits contributes to ongoing market volatility, particularly as liquidity dynamics move towards a new normal where month-end financial strain appears less prevalent.
From a fundamental standpoint, high-frequency data suggest that demand for raw materials is beginning to wane, with notable decreases in cement clinker utilization rates this week. Conversely, stability was observed in daily iron output, while asphalt production from low-inventory sources saw a rebound. In downstream sectors, production rates for polyester filament and both semi-steel and full-steel automotive tires were slightly above seasonal expectations, whereas the operational rates of weaving machines in Jiangsu and Zhejiang fell compared to year-ago levels.
Liquidity and policy interactions reveal that the funding landscape is undergoing a significant transformation as we approach the end of the month. December traditionally marks a period of heightened fiscal expenditure, and there are expectations for a hastened budget execution to meet initial targets. As local governments step up refinancing initiatives, the gradual repayment of hidden debts will unfold. In light of current projections—estimating that repayment will lead to a drop in banking credit totalling approximately 1.4 trillion CNY—this could stimulate a positive shift in liquidity and bank framework indicators.
As local replacement bonds start to be distributed, stable rates may emerge post-issuance. Initially, pressures can cause upward surges in rates as banks adjust their allocations, compounded by secondary market sentiments. However, as new bonds are issued concurrently with repayments, favorable liquidity conditions can subsequently stabilize market trading emotions. Given that the repricing of deposits occurs over extended cycles, coupled with severe reliance on term deposits, banks may see a slower decline in liability costs, which can constrain the scope for bond pricing adjustments. Current estimates suggest that with significant surges in first-quarter deposit figures in 2022, particularly those aligned with three-year terms maturing in early 2025, bank deposits will face a wave of repricing adjustments yielding an accumulated decline of 110 basis points in deposit rates over the upcoming months.
As December progresses, attention will need to be directed towards the outcomes of upcoming political bureau meetings and central economic work conferences, particularly concerning fiscal and monetary policy directions. These developments are critical for investors and market analysts as they parse through emerging signals in a complex economic environment where adaptability and foresight are more crucial than ever.
- 2024-10-12
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