Macro economic landscape during China's National Day holiday

During China's National Day holiday from Oct 1 to 7, the overseas market has experienced significant choppiness.

US dollar and crude oil prices roses at the same time. The conflict between Iran and Israel has led to escalating tensions in the Middle East. US, Japan, and European central banks may change the moves, causing fluctuations in US dollar. Amid the complexity, whether China's macro policies can stabilize the fundamentals has become a key focus for the market.

Middle East tensions escalating, disrupting crude oil supply

Before the holiday, the sentiment in crude oil market was relatively weak, mainly influenced by the expectation of weak demand and return of oil supply. From the current situation, OPEC+ is still planning to increase production starting in December. However, as the geopolitical tensions in the Middle East continue to escalate, the market expects it to impact crude oil price.

On the night of October 1, Iran launched multiple missiles from its territory towards Israel and warned that if Israel retaliated against what it deemed legitimate defense actions, it would face devastating consequences. Israeli Defense Forces spokesman stated that Iran conducted a serious action on October 1 and pushed the situation in the Middle East toward escalation.

Currently, the market is beginning to worry about the possibility of an Israeli attack on Iranian oil fields. Data shows that in August of this year, Iran's oil production was 3.277 million barrels per day, with about half of that being exported. Additionally, factors such as the Houthi militant may further impact on the oil supply chain.

US President Biden has indicated that the US is considering sanctions on crude oil against Iran as an alternative choice. However, senior officials from the US State Department stated that Israel has not guaranteed it will refrain from retaliatory strikes on Iranian nuclear facilities.

As a result of these events, international crude oil prices have risen for five consecutive days, reaching a six-week high. Moving forward, the market will closely monitor whether geopolitical factors would continue to escalate, as it could heavily affecting oil supply.

Central Banks' policy adjusted, and exchange rate fluctuates

One of the main market logic before the holiday was the weak dollar amid expectations of a Federal Reserve rate cut cycle coupled with Japan's interest rate hike. However, the market sentiment shifted somewhat during the holiday.

In the US, September non-farm payroll report was promising, with an increase of 254,000 jobs far exceeding expectations, marking the highest figure in six months, and an unexpected decline in the unemployment rate accompanied by strong wage growth. The market is no longer betting on a significant rate cut in November and expects future cuts to be around 25 basis points each. Some are even discussing suspension of interest rate cut.

In Japan, following the formal election of Ishiba Shigeru as Prime Minister, he stated that overcoming deflation is the top priority for Japan's economy and called for the central bank to maintain a loose monetary policy, which contrasts sharply with previous hawkish expectations in the market. Bank of Japan Governor stated that the central bank is supporting the economy through a loose monetary environment and will carefully decide whether to raise interest rates further.

Additionally, inflation in the Eurozone has cooled significantly, with the September CPI turning negative on a month-on-month basis and falling to 1.8% year-on-year, dipping below the European Central Bank's target, which greatly increases the likelihood of rate cuts from the ECB this month. The Bank of England's Governor has also mentioned the possibility of more aggressive rate cuts.

The adjustment in expectations regarding major central bank actions, coupled with rising market risk aversion, has become a significant reason for the strengthening of US dollar, and against this backdrop, the offshore Chinese yuan has faced noticeable correction pressure.

China's policy continue taking effect

The Fed's rate cut cycle combined with uncertainties in the US elections has led to a more complicated overseas environment, which may also bring certain disturbances to the China domestic market, for instance, the recent fluctuations in the yuan's trend. However, it appears that China domestic policy support remains on track.

The State Council Information Office will hold a press conference on October 8, where the National Development and Reform Commission will introduce measures to "systematically implement a package of incremental policies to solidly promote economic stability and structural improvement, ensuring continuous positive development trends."

However, it may still be necessary for fiscal policy to continue to exert influence going forward, to help stabilize the market fundamentals, which is also key to improving market expectations.

From leading economic indicators, China's official manufacturing PMI rose to 49.8 in September, remaining below the critital line for five consecutive months, while the non-manufacturing sector showed a slight decline. The Caixin manufacturing PMI for China fell to 49.3 in September, the lowest since August 2023.

More than 50 cities have introduced optimization policies for their local real estate markets, and sales of commercial housing have increased in many areas. During the National Day holiday, indicators reflecting home-buying intentions, such as the volume of property viewings and visits, increased significantly, and sales of commercial housing saw varying degrees of growth across different regions, indicating some recovery in market confidence. However, the restoration of sentiment may still be a gradual process.