The slowdown in Chinese economic growth for the third quarter was less pronounced than expected, benefiting stock market indices.
In Europe, the economic situation has evolved with, on the one hand, a more noticeable slowdown in inflation and, on the other hand, a deterioration in economic outlooks.
In the United States, recent reports show an economy that remains resilient, both in terms of consumer activity and the labor market.
The Chinese economic stimulus plan’s precise details are still awaited, but authorities have reiterated their commitment to support activity through additional debt issuance to assist local governments, households, and the real estate sector. Moreover, the third-quarter economic growth slowdown was less severe than expected, benefiting Chinese stock indices. The improvement in the Chinese economy is eagerly awaited by Europe, which has recently suffered from China’s weakness, as reflected in the results of several European companies with exposure to China this week.
In Europe, the economic situation has evolved with, on the one hand, a more pronounced slowdown in inflation and, on the other hand, a worsening of economic outlooks. In response to this dynamic, the European Central Bank (ECB) cut its key interest rates for the third time this year by 25 basis points, bringing the deposit rate to 3.25%. However, Christine Lagarde gave no clear indication of future actions. Consequently, the impact on European interest rates and equities was limited after these announcements. In the United Kingdom, disinflation is also continuing, driven by easing labor market tensions and slowing wage growth. Core inflation fell significantly in September, especially in services, leading to a drop in interest rates of nearly 20 basis points in a few days.
In the United States, recent reports show an economy that remains resilient, with strong consumer spending and a robust labor market. Retail sales rose by 0.4%, four times higher than the last release, and jobless claims fell to 241,000 compared to 258,000 previously. This economic resilience reduces the need for a new 50-basis-point interest rate cut, which caused a slight rebound in U.S. interest rates following the publication of these figures. Politically, with less than three weeks before the elections, Donald Trump is gaining ground in the polls, with Nevada and Michigan flipping in his favor, giving him 302 electoral votes versus 236 for Kamala Harris. This favorable momentum for the former president contributed to the rebound in U.S. sovereign interest rates, as his policies are seen as more inflationary than Kamala Harris's.
On the oil market, OPEC's new downward revision of demand forecasts (particularly in China) and U.S. assurances that Israeli retaliation against Iran would not target the country's energy infrastructure pushed the price of a barrel down to around $75.
In a market environment dominated by short-term uncertainty related to the U.S. election results and geopolitical risk, we maintain a neutral position on risky assets. Within equities, we prefer exposure to Japanese stocks, which benefit from an accommodative stance from the new prime minister and are less exposed to these uncertainties. We are taking profits on UK stocks in connection with the drop in oil prices. In the bond market, we remain neutral, favoring a flexible approach in a context where interest rate dynamics may diverge in the short term.
EUROPEAN STOCKS
On October 17, 2024, the European Central Bank (ECB) announced a new cut to its deposit rate, lowering it to 3.25%. During the press conference, Christine Lagarde explained that this decision aimed to support a stagnating European economy, while noting that growth forecasts had been revised downward. European markets reacted positively to the announcement, though they remain cautious about decisions by the Federal Reserve, which could influence their future directions. The rate cut and the downward revision of inflation benefited rate-sensitive sectors, with utilities and communication services outperforming the European stock market this week.
On the microeconomic level, volatility was present due to the start of earnings season. In the luxury sector, LVMH reported a 3% decline in growth, mainly due to a 5% contraction in its Fashion & Leather Goods division, a figure well below analysts' expectations. After the results were published, the stock initially dropped by 6%, although it rebounded on Friday, supported by positive economic statistics from China. Meanwhile, Brunello Cucinelli posted nearly 13% growth over the first nine months of the year, in line with market expectations. However, these results were well-received by the market since Brunello Cucinelli is one of the few companies not impacted by China's slowdown.
In contrast, ASML delivered very disappointing results, especially in terms of order intake, which fell far short of forecasts. As a result, management revised its annual earnings outlook downward, causing the stock to plunge nearly 20% after the announcement.
One of the week's highlights was Ferrari's unveiling of its new supercar, the F80. Supercars, developed every ten years, incorporate the most advanced technologies from their high-performance department, including R&D teams from F1 and endurance racing. Ferrari plans to produce 799 units, priced at $3.9 million each. Although this announcement was anticipated by investors and is part of Ferrari's 2022-2026 strategic plan, both the production volume and price exceeded analysts' estimates, resulting in a positive market reaction. Ferrari stock has already shown strong performance this year, significantly outperforming the broader automotive sector.
AMERICAN STOCKS
It was another week of gains for U.S. markets, finally supported by the performance of small-cap stocks. The Russell 2000 rose by 2.2%, driven by the strong performance of regional banks (+4.19% for the index). The S&P 500 increased by 0.48%, while ASML's results in Europe, which affect the American semiconductor value chain, put relative pressure on the Nasdaq 100, which fell by 0.43%.
Regional banks were buoyed by multiple earnings reports from financial institutions. Citi's better-than-expected results were supported by higher banking fees, with a surprising 32% year-over-year increase in equity trading and service revenues. However, net interest income for the quarter fell short of expectations. As for BofA, there were no negative surprises on profits, but loan growth was weak, and costs increased due to wages and specific investments. This trend of higher-than-expected costs was seen in many companies' reports, fueling concerns about a potential return of inflation. This was particularly the case for US Bancorp, the largest regional bank in the U.S., which also reported a direct impact of lower rates on its mortgage lending business and increased consumer spending. Their credit card transaction volume was up 1% compared to the previous year. Interactive Brokers also reported high costs, in this case due to a marketing campaign. The broker noted that transactional activity remained strong, though there was a slight dip at the end of September.
In the healthcare sector, insurers UnitedHealth and Humana reported increased use of insurance by patients, especially seniors and those financially vulnerable.
In the cosmetics sector, Coty lowered its revenue growth forecast for Q1 by 1%, from 6% to 5%, causing an unusual market reaction, with the stock dropping nearly 15%. Ulta also reduced its long-term growth and margin forecasts by 1 to 2%.
Lastly, positive news in the nuclear sector continues: Amazon announced a new partnership with Dominion Energy to develop its own Small Modular Reactors (SMRs).
EMERGING MARKETS
The MSCI Emerging Markets (EM) index fell another 2.1% this week as of Thursday's close, largely due to a 6.5% drop in the Chinese market. India and South Korea declined by 1.2%, while Brazil and Taiwan remained nearly stable, with modest gains of 0.4% and 0.3%, respectively.
In China, third-quarter GDP grew by 4.6% year-over-year, slightly above the consensus forecast of 4.5%. September retail sales increased by 3.2%, compared to an expected 2.5%, and industrial production grew by 5.4%, significantly outperforming estimates of 4.6%. However, September exports rose by just 2.4% year-over-year, well below expectations (+6%), while imports increased by 0.3% (versus the 0.8% forecast). The consumer price index (CPI) rose 0.4% year-over-year, down from +0.6% in August, while producer price index (PPI) deflation worsened (-2.8% year-over-year), below market expectations. The governor of the People's Bank of China (PBoC) pledged to boost market confidence by providing loans to facilitate stock buybacks and using other tools to support the economy. He also announced the likely reduction of the loan prime rate (LPR) and banks' reserve requirement ratio by the end of the year. In two briefings held this week, the Ministries of Finance and Housing were reassuring but did not provide specific figures. NAURA reported preliminary third-quarter results, showing revenue growth in line with forecasts (+29% year-over-year) and net profit exceeding expectations (+53% year-over-year).
Hong Kong will ease mortgage credit rules and cut an alcohol tax as part of a series of diverse measures aimed at supporting its struggling real estate sector and stimulating consumer spending.
In Taiwan, TSMC announced record-breaking figures, surpassing all expectations. Margins were particularly strong due to increased production capacity utilization and operational leverage. Meanwhile, the U.S. is investigating the relationship between TSMC and Huawei.
In South Korea, LG Energy Solution secured an $11 billion contract to supply electric vehicle batteries to Ford in Europe.
In Thailand, the central bank unexpectedly cut its benchmark interest rate for the first time since 2020.
India’s industrial production declined for the first time in nearly two years in August, shrinking by 0.1% compared to last year after a 4.7% growth in July. According to vehicle registration data during the Navratri celebrations (October 3–12, the first phase of a 32-day festival period in India), two-wheeler sales increased by 15% year-over-year, compared to a 7% year-over-year rise for cars relative to 2023 figures (October 15–24). Dmart reported revenue growth and an EBITDA margin below expectations due to rising costs. HCL posted revenue growth above forecasts and a higher-than-expected EBITDA margin in its software business. Infosys also improved its growth outlook, with 2025 forecasts revised upward.
The Brazilian real remains volatile amid concerns over public spending. Mexico passed an energy law that strengthens state control over Pemex and CFE. The MXN remains volatile ahead of the U.S. elections, particularly after Donald Trump's latest statement reported by Bloomberg: “Automakers building factories in Mexico are a 'serious threat' to the United States.”
CORPORATE DEBT
CREDIT MARKETS
It was another positive week for credit markets, with yields declining on the German 10-year bond (-6 basis points) and the crossover index tightening by 10 basis points. In reality, nothing this week disrupted the momentum in credit, with inflation data, particularly in the UK, continuing their downward trend, and economic indicators (UK/US retail sales, US jobs) remaining relatively resilient. Technical factors also provided support: the High Yield segment delivered a 0.40% performance (+6.85% year-to-date) and saw a record weekly inflow of $1.5 billion.
Moreover, the primary market remains open and active. Saur (BB+), a French and international water supplier, issued a bond maturing in 2029 with a 4.875% coupon. SIG (B-), a British company providing specialized insulation and sustainable construction solutions, placed a 2029 bond with a 9.75% coupon.
We also noted strong results from Fnac Darty and CCK, both of which raised their full-year guidance after solid third-quarter results. However, challenges in the automotive sector persist: Moody’s downgraded Faurecia’s rating by one notch to Ba3/stable, and Volvo reported third-quarter sales below analyst expectations.
In the financial sector, Euro-denominated CoCos (Contingent Convertible Bonds) significantly outperformed this week, gaining 1.03% (12.05% YTD). The asset class continues to benefit from support from Asian investors, seeking to lock in attractive absolute yields (currently around 6% for Euro CoCos). The primary market has now quieted down as earnings season begins. U.S. banks have generally surprised the market positively, with strong results from both investment and private banks. In Europe, Nordea kicked off the season by raising its guidance for 2025, now expecting a return on equity (RoE) above 16%.
Completed on October 18, 2024.
GLOSSARY
• Investment Grade Bonds: Bonds issued by companies with a low to moderate risk of default, with ratings from AAA to BBB- (Standard & Poor's scale).
• High Yield Bonds: Corporate bonds with a higher risk of default compared to Investment Grade bonds, offering higher coupons in return.
• Senior Debt: Debt that has specific guarantees and is repaid before other types of debt, like subordinated debt.
• Subordinated Debt: Debt that is repaid only after other creditors have been paid.
• Tier 2 / Tier 3: Subsegments of subordinated debt.
• Duration: The weighted average time until a bond’s cash flows (interest and principal) are paid.
• Spread: The difference between the yield on a bond and the yield on a risk-free government bond of the same maturity.
• Value Stocks: Stocks considered undervalued by the market.
• EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization, which measures a company’s profitability before accounting for capital costs.
• Quantitative Easing (QE): A non-conventional monetary policy used by central banks in exceptional economic situations.
• Stress Test: A technique used to evaluate the resilience of financial institutions under adverse conditions.
• PMI (Purchasing Managers' Index): An economic indicator reflecting the health of a sector.
• CoCos (Contingent Convertible Bonds): A type of subordinated debt.
• Mortgage: A financial instrument that secures a debt with property as collateral.
• AT1 (Additional Tier 1): A category of bank capital instruments known as CoCos (Contingent Convertibles), which convert to equity or are written off if the bank's capital falls below a certain threshold.
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