Up: bond yields, oil, Chinese stocks, bitcoin… Down: everything else… The Chinese stimulus effect… War moves… Stateside jobs update… At least a dozen Fed speakers this week… Diamond’s Edge: The long-term path for rates…

This was a ‘risk off’ day for the U.S. market…

As I (Corey McLaughlin) looked at today’s market action, I couldn’t see it any other way… and I tried.

Here’s what was up: long-term Treasury yields (the 10-year yield is back above 4%) and oil prices (up nearly 3%), along with Chinese stocks (ginned up by China’s own central-bank stimulus) and bitcoin, which has been doing its own thing for at least a few months.

Here’s what was down: just about everything else, at least at a headline level, including U.S. stocks. The benchmark S&P 500 Index and its equal-weight version were off roughly 1%, and the CBOE Volatility Index (“VIX”) moved higher to around 23.

Gold wasn’t higher, but it held up better than stocks, dropping just 0.3%.

Ahead of the heart of earnings season – which will start generating headlines soon – the market narrative continues to be dominated by the threat of escalating war in the Middle East and, increasingly, the Chinese central bank’s monetary-policy “bazooka.”

The Chinese stimulus effect…

When the world’s second-largest economy gets a huge lift from its central bank, it matters.

On September 25, we reported on the People’s Bank of China’s (“PBOC”) stimulus plans. As we said, it’s the largest such effort since the pandemic. The PBOC hopes to boost an economy dealing with deflation and property market collapse that has reportedly erased $18 trillion in household wealth…

The PBOC slashed several interest rates, said it would lower the reserve requirements for banks soon, and intervened directly in the stock market. It set up facilities to allow brokers, funds, and insurers to pledge assets for liquidity to buy stocks – a first – and more.

Major Chinese stock indexes spiked yesterday on the announcements but are still well below pre-pandemic levels. This leaves analysts wondering if the stimulus plans are “enough” while weighing concerns about debt burdens and more inflation. Sounds familiar.

Well, since we wrote those words, Chinese stock indexes have pushed higher and higher with little interruption. For example, the iShares China Large-Cap Fund (FXI) is up 26% since that Digest hit your inbox, including a 4.5% gain today.

Investors are giddy over the Chinese central bank finally delivering what many who watch the Chinese economy and markets have been calling for and expecting for years. It stems from more than just the country’s punishing COVID-19 lockdowns… extending to the emergence of “ghost cities,” the blowup of the Evergrande property developer, and youth unemployment rising to a level the Chinese government decided not to report anymore.

In this latest boost, the PBOC lowered existing mortgage rates by roughly 0.5 percentage points, which could put about 150 billion yuan (roughly $21 billion) in Chinese consumers’ pockets. And it lowered the minimum down payment required for new homebuyers to as little as 15%.

Plus, as we alluded to above, the Chinese central bank also designated 500 billion yuan (around $71 billion) for Chinese firms to buy Chinese stocks on the open market. Our Director of Research Matt Weinschenk shared more detail and his takeon the stimulus in Friday’s edition of This Week on Wall Street.

Given the expected effect on consumer spending in China and the extra liquidity for market power brokers to play with, Chinese stocks have soared. As our colleague Sean Michael Cummings wrote in this morning’s edition of the free DailyWealthnewsletter…

Chinese stocks have gone from flat to one of the best-performing assets of the year. We can see it by looking at the KraneShares MSCI All China Index Fund (KALL)…

This fund tracks a market-cap-weighted basket of large- and mid-cap Chinese stocks. And it acts as a good stand-in for Chinese stocks.

KALL exploded higher last month. Take a look…

Chinese stocks have now rocketed an astonishing 35% higher this year… And most of it happened in the wake of last month’s fiscal announcement.

That’s better year-to-date performance than the S&P 500 Index (at 20%), the Nasdaq Composite Index (at 19%), and even gold (at 29%).

This “help” for the Chinese market may not be finished…

First, the PBOC has left the door open for the possibility of further stimulus “depending on the future situation,” and many analysts and Chinese investors expect the bank to deliver. And we’ve seen little fiscal stimulus so far, which could further boost the outlook for the Chinese economy.

For a lot more on this subject, be sure to check out this week’s Stansberry Investor Hour podcast, hosted by Dan Ferris and yours truly. The new episode goes live this evening on our website, our YouTube channel, and popular podcast platforms like Spotify or iTunes.

This week, KraneShares chief investment officer Brendan Ahern – who runs a few China-focused exchange-traded funds – joined us to explain the impact of the recent stimulus announcements from the Chinese central bank… and how more is likely on the way.

The latest war moves…

I’ve written here about the influence of the threat of more war and Middle East oil facilities getting caught up in the crossfire of the escalating battle between Iran and Israel. No doubt, questions about what comes next have been a driver of higher prices.

The latest reports today describe an upcoming meeting between Iran’s President Masoud Pezeshkian and Russian President Vladimir Putin, which will take place Friday at an event in the Central Asian country of Turkmenistan.

They presumably won’t be talking about the American baseball playoffs but how to use their oil supply as leverage in conflicts with Western nations will be part of the discussion. The guise is actually poetry, though, as the global news agency AFP reported today…

Yury Ushakov, Putin’s aide on foreign policy, told journalists the leaders will meet in Ashgabat while attending an event celebrating a Turkmen poet.

“This meeting has great significance both for discussing bilateral issues as well as, of course, discussing the sharply escalated situation in the Middle East,” Ushakov said.

Leaders of Central Asian countries are meeting to commemorate the 300th anniversary of the birth of 18th-century poet Magtymguly Pyragy.

Last week, the Russian prime minister met with Iran’s president in Iran, as Israel has attacked Iranian proxy groups in Lebanon, where Russia has interests. You can see how the two major wars in Eastern Europe and the Middle East can draw closer quick.

Iran’s president and Putin will also reportedly meet again during a visit to Russia later this month during a gathering of BRICS nations (Brazil, Russia, India, China, South Africa, and a growing list of others seeking a world without the dollar as its reserve currency).

So, yeah, the wars in the Middle East and Ukraine matter.

An expected boost to China’s economy plays a role in oil prices, too…

As our colleague Vic Lederman at our corporate affiliate Chaikin Analytics pointed out in a piece today, China is the world’s second-largest consumer of oil, and it’s the world’s largest oil importer.

Many, many factors contribute to the price of energy at any given moment, but the stimulus measures from the PBOC “are a powerful jolt” that Vic says should serve as a tailwind for oil demand globally.

While oil prices dropped initially in the two days after the Chinese central bank’s stimulus announcement, Brent crude – the international benchmark – is up 13% since September 26 and moved above $81 per barrel today.

West Texas Intermediate, the U.S. standard, is up around the same percentage in the same span to around $77 per barrel today.

Central-bank stimulus from China or the U.S., or anyone else, may generally be welcomed in the market in local and global markets in the short term. But remember the second-order consequences: These moves could reignite higher inflation.

That’s what the U.S. Treasury market has been saying since the day the Fed cut its federal-funds target range by 50 basis points last month.

Declining unemployment and a strike averted, for now…

Let’s put a bow on two open points we discussed last week. Friday’s jobs report came in stronger than expected, at least on the headline level, with the unemployment rate dropping from 4.2% to 4.1%. As we suspected would happen in this scenario, the market reacted bullishly.

Also on Friday, the union representing workers at East and Gulf Coast ports reached a deal to suspend a strike that had begun on October 1. That gives the parties until January 15, 2025 to figure out all the terms.

Workers already got one of the big things they were looking for: the promise of a large pay raise. The deal involves a 61.5% wage increase over the next six years. Remaining points about assurances related to job automation are still under negotiation.

What to watch this week…

Get ready for it… I count at least a dozen scheduled public speaking appearances this week for members of the Federal Reserve. That includes two apiece from Michelle “The Dissenter” Bowman and Austan Goolsbee.

So, clearly, the central bank will be getting some message out this week. I suspect it will be the idea that the Fed will probably cut rates by another 25 basis points at its next meeting in November… should current trends in the job market and inflation continue.

Midweek, the latest inventory data on crude oil and petroleum should get more attention than typical, given the moves in the energy market over the past two weeks.

And then there’s inflation… Despite the Fed’s public belief that inflation is down to the 2% “range” that it now targets, everyone will still watch these numbers for reassurance or signs of trouble. The U.S. consumer price index for September comes out Thursday, followed by the producer price index on Friday.

New 52-week highs (as of 10/4/24): Automatic Data Processing (ADP), American Financial (AFG), Atmus Filtration Technologies (ATMU), American Express (AXP), Alpha Architect 1-3 Month Box Fund (BOXX), BWX Technologies (BWXT), Constellation Energy (CEG), CF Industries (CF), Ciena (CIEN), Pacer U.S. Cash Cows 100 Fund (COWZ), Carlisle (CSL), Comfort Systems USA (FIX), iShares U.S. Aerospace & Defense Fund (ITA), Kinder Morgan (KMI), Lumentum (LITE), Cheniere Energy (LNG), Meta Platforms (META), Oracle (ORCL), Pembina Pipeline (PBA), RenaissanceRe (RNR), Sprouts Farmers Market (SFM), Toast (TOST), Texas Pacific Land (TPL), The Trade Desk (TTD), Viper Energy (VNOM), Vistra (VST), ExxonMobil (XOM), and ProShares Ultra FTSE China 50 (XPP).

In today’s mailbag, feedback on Dan Ferris’ latest Friday essay… Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

“As a Stansberry subscriber for quite some time, I always think twice about dismissing Dan’s (typical?) Friday Bearishness. The more time goes on, the more sense he makes. Although I don’t know whether to position for The End Of The World, or The Best Of All Worlds, one thing I picked up from Dan Ferris [is] make sure you’re OK, either way. His slogan, ‘Prepare, don’t predict’ has become a watchword in my household. Thanks, Dan. Live Long And Prosper. And may the Force be with you.” – Subscriber Chuck B.

“Corey… interesting day [on Friday], eh. I’m richer, you’re richer but…

“… FED CREDIBILITY?…

“… My forecast before the recent rate cut, which is why I urged the Fed to exercise CAUTION, is coming true. Real Rates are once again rising on today’s correction of Volatile data…

“Me? I think the FED may have triggered the VOLCKER1 to VOLCKER2 Crisis. Good news? We have two more rate cuts before the consequences, if so.” – Stansberry Alliance member Bill B.

Corey McLaughlin comment: Thanks for the note, Bill. I gave up on the Fed having credibility – in its economic forecasts in particular – after my first year following the central bank’s decisions closely many years ago. They are literally always wrong, and the Fed is late at best in reacting to trends, based on the backward-looking data it relies on.

I tend to agree with you on one or two more rate cuts coming before crap possibly hits the fan about high(er) inflation, again, late this year or in 2025.

All the best,

Corey McLaughlin
Baltimore, Maryland
October 7, 2024