A Tale of Two Stimuli: Will US and China’s Rate Cuts Sustain a Rally?

This September, we saw two major monetary policy moves from global superpowers—the US Federal Reserve cut rates by 0.5%, and China’s central bank followed suit with a rate cut and a relaxation of mortgage policies. Let’s explore the impact of these actions on their domestic markets and the broader global landscape.

US Market

The Federal Reserve lowered the federal funds rate by 50 basis points to a target range of 4.75%–5.0%, though the decision wasn’t unanimous. This "recalibration" in policy, as described by Fed Chair Powell, aims to support the labor market. Powell noted that their patience in holding rates steady had helped reduce inflation, but he cautioned that we shouldn't expect large, frequent cuts in the future.

US stocks responded positively, with the S&P 500 and the Dow Jones reaching new all-time highs. Ten of the eleven sectors posted gains, with the tech sector leading the charge, while energy lagged. A strong jobs report further boosted investor confidence in the economy, sending the S&P 500 and Nasdaq 100 higher. However, inflation in September rose slightly more than forecasted, with the CPI increasing 2.4% year-on-year, which may lead the Fed to take a slower approach in future rate adjustments. The Nasdaq is on the verge of hitting a new high, riding the wave of the ongoing AI tech story.

China Market

In what is likely China’s most comprehensive easing since 2015, the People's Bank of China (PBOC) announced several stimulus measures, including rate cuts and new tools to support housing and equity markets. Key moves included a 20 basis point cut in the 7-day reverse repo rate, a 50 basis point cut in the banks' reserve requirement ratio, and relaxation of mortgage policies. Additionally, the PBOC introduced instruments to support stock market development, such as a special refinancing facility for share buybacks.

Chinese stocks reacted strongly, with the CSI 300 Index experiencing its largest weekly gain in almost a decade, rising by 25%. This came on the back of stimulus pledges by the government and strong US economic data. However, despite the initial euphoria, Chinese stocks gave back nearly half their gains as skepticism over the stimulus took hold. The Shanghai Composite and CSI 300 indices suffered their biggest one-day percentage drops since February 2020 after the huge surge in the stock market.

Global Observations and Concerns

Interestingly, despite significant rallies in the US and Chinese markets, global markets have had a more mixed reaction. Historically, such strong monetary stimulus from the world’s two largest economies would have triggered a worldwide market rally. However, this time, two possible factors could explain the muted global response.

First, the trend toward deglobalization may be leading investors to focus more on domestic markets, adopting a wait-and-see attitude toward international developments, while heavily discounting any spillover from the positive developments from US and China. 

Second, skepticism about China’s ability to sustain its market rally could be dampening regional optimism. China has attempted smaller stimulus measures over the past two years, which initially boosted markets but ultimately failed to sustain momentum as economic data continued to disappoint.

China stock market's recent short lived rallies

The PBOC’s direct involvement in equity markets signals a clear shift from previous policy, which generally discouraged speculation. Now, the central bank seems to be actively encouraging it, reflecting a sense of urgency among policymakers to restore confidence and prevent further wealth erosion. This suggests a potential short-term trading opportunity in Chinese equities, but the long-term outlook remains uncertain due to lingering macroeconomic weaknesses. Recent relief rallies in China have been short-lived, and this pattern may repeat unless we see stronger demand-side recovery.

Portfolio Performance & Strategy

The portfolio experienced a rally in September, driven by positive developments in both the US and China. Specifically, returns for the month were 0.99% for Cash, 1.95% for CPF-OA, and 1.17% for SRS, with a year-to-date performance of 12.91% for cash investments.

The US stock market remains well-positioned, as long as interest rates are carefully managed to cushion any economic slowdown. Meanwhile, China’s market is regaining attention following the latest stimulus measures, though we will need to see if they can successfully revive the economy. History, such as Japan’s "lost decade," has shown that monetary policy alone may not be enough to address deeper structural challenges. However, China’s economy appears more dynamic than Japan’s in the 1980s, offering some optimism that it can avoid a similar fate.

As expected, the recent rate cuts have fueled this rally, which is likely to persist until the end of the year. As we approach year-end, we plan to gradually reduce the aggressiveness of our portfolio. While this may lead to lower returns in the short term, it will allow us to accumulate more conservative assets, positioning ourselves for the next bear market. This disciplined approach will ensure we have the necessary resources for future opportunities.

This is also a good time to start putting in your SRS and catch the a good return into the end of the year.

In summary, we are maintaining an aggressive approach, capitalizing on the ongoing rally while preparing for more defensive moves as we head into 2025.

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