Global markets surged on Thursday, led by a rally in Asian stocks after China announced aggressive economic stimulus measures aimed at bolstering its slowing economy. European equities followed suit, with the Stoxx 600 index jumping 1%, inching closer to an all-time high set in August. Chinese onshore blue chips and Hong Kong's Hang Seng Index also saw gains of over 4%, driven by renewed optimism from Beijing's fiscal efforts.
The uptick in stocks comes on the heels of a statement from China's Politburo, signaling the government's readiness to deploy "necessary fiscal spending" to achieve its economic growth target of around 5% for the year. The news raised expectations for additional stimulus measures, further boosting market sentiment. This week's actions, including interest rate cuts and new macroeconomic policies, have set the stage for what some analysts see as a comprehensive stimulus package.
"Chinese stimulus measures increasingly look like a comprehensive package," said Yvan Mamalet, senior economist at Kleinwort Hambros. "Now they're talking about adding a fiscal stimulus, which every economist was saying was the missing link."
In addition to this, Reuters reported that China plans to issue special sovereign bonds worth approximately 2 trillion yuan ($284 billion) to stimulate consumption further. This news sparked a rally across various asset classes, with Asian and European tech stocks leading the charge, and commodities such as copper and rubber seeing substantial gains.
Oil Prices Fall, Saudi Arabia Adjusts Crude Price Targets
Meanwhile, oil prices dropped by more than 2.5% after reports surfaced that Saudi Arabia is preparing to abandon its unofficial $100 per barrel price target. The news added to the downward pressure on Brent and U.S. crude futures, which have been volatile in recent months due to shifting supply dynamics and concerns over global demand.
European energy stocks took a hit, with the sector down 3%, making it the only significant outlier in an otherwise bullish market. However, the oil price drop is seen as a temporary relief for sectors heavily impacted by rising energy costs.
Stimulus Measures and Rate Cuts Drive Broader Market Gains
The broader global market rally extended to U.S. stock futures, with S&P 500 futures up 0.75% and Nasdaq futures gaining 1.4%, driven partly by the strong performance of tech stocks in Asia. A surge in shares of Micron Technology, fueled by higher-than-expected revenue forecasts driven by artificial intelligence (AI) demand for chips, added to the positive sentiment.
The rally in global stocks comes at a time when central banks around the world are easing rates, providing further support to market bulls. The Federal Reserve, along with several other central banks, has recently shifted to a more dovish stance, with markets now pricing in a 62% chance of a 50 basis-point rate cut at the Fed's November meeting.
However, while the current momentum is strong, some analysts warn that the rally could face headwinds as profit-taking risks loom, especially as the S&P 500 approaches technically overbought levels. With U.S. elections and third-quarter earnings reports on the horizon, investors may become more cautious, particularly as momentum indicators like the Relative Strength Index (RSI) suggest the market is nearing overbought territory.
"The S&P 500 has risen in 10 out of the last 11 months, gaining an incredible 40% off its low last October. The index's momentum is impressive, but overbought conditions could lead to a correction as we enter the fourth quarter," said one analyst.
European and Asian Markets Reflect Stimulus Optimism
European and Asian markets were particularly buoyant following the Chinese stimulus news. In Europe, luxury stocks saw significant gains, while banking shares also surged. Commerzbank shares reached their highest level since 2011, up 6.6%, as the German lender prepares for talks with Italy's UniCredit about a possible tie-up. UniCredit shares also rallied, rising 4%.
On the central bank front, the Swiss National Bank (SNB) opted for a smaller-than-expected 25 basis-point rate cut, its third such move this year. While this briefly strengthened the Swiss franc against the euro and the dollar, the impact was short-lived, and the franc remained relatively stable by the end of the day.
In the eurozone, investors are closely watching the European Central Bank (ECB), where policy doves are preparing to push for a rate cut next month following weaker-than-expected economic data. However, some believe the ECB may hold off on a cut until December, particularly if inflation surprises to the upside.
"The bar is quite high for the ECB to cut in October, but weaker inflation data could shift that calculus," said Mamalet of Kleinwort Hambros.
Cautious Optimism as Markets Head into Q4
Despite the rally, some investors remain cautious as the S&P 500 approaches what some analysts describe as overbought territory. With the U.S. elections and third-quarter earnings just around the corner, the potential for profit-taking in the fourth quarter could increase. The S&P 500 has rallied nearly 65% from its post-COVID lows, leading some to question how long the momentum can continue without a significant pullback.
Nevertheless, with central banks easing rates and China stepping up its stimulus efforts, the market outlook remains largely positive for the near term. Investors will be closely watching upcoming speeches from Federal Reserve Chair Jerome Powell and other Fed policymakers for further clues on the U.S. interest rate outlook.
