Finsphere
Issue 08 | October 24 
Your Monthly Guide on Global and Local markets from our Business Head’s Desk. 
October Begins with Uncertainty:
Global Markets React to Rising Geopolitical Tensions and Rate Shifts.
Dear Esteemed Clients,
As we embark on eventful October after strong September for equities, caution seems to be in the air. Geo-political tensions in Middle east have aggravated, commodity prices are up despite strengthening US dollar while US 10-year bond yield has climbed back to 3.96% after making a low of around 3.62% in mid-September. The long-anticipated shift in the Federal Reserve's stance towards rate cuts, alongside a softer tone from Japanese policymakers and renewed calibrated stimulus in China, played a pivotal role in balancing concerns related to rising tension in middle-east.
A key market update over the past few weeks has been the portfolio re-alignment by global fund managers in light of above developments. Whereby, Asian and European equities witnessed profit taking while China emerged as a sole gainer. Shanghai Composite and Hang Seng index gained over 30%, becoming the best performing equity index in CY’24 thus far. Going forward we sense; regional dynamics will be pivotal for equity basket.
The U.S. markets enjoyed a robust month, with major indices posting strong gains. The S&P 500 rose by 4.2%, the Nasdaq 100 by 5.8%, and the Dow Jones by 3.4%, driven by optimism over the Federal Reserve’s recent rate cut. Adding fuel to fire is latest unemployment data for August which saw it dipping to 4.10% from highs of 4.30% and expectation of 4.20%. US markets are now gearing up for Q3 earnings update by corporates and the upcoming U.S. presidential election. Recent surge is US dollar and renewed buying in bonds does paint a cautionary picture for the month of October. We expect swings of volatility in US markets till first week of November by when both earnings update and US Presidential election outcome will be known.
Looking at the broader international landscape, the Euro Stoxx 50 in Europe edged up 0.55%, benefiting from the European Central Bank's easing measures. The Bank of England followed suit with a 25-basis point cut in August, although the UK's FTSE 100 recorded a decline of 1.52%. In Asia, markets were more mixed, with Japan’s Nikkei 225 down 2.02% and South Korea’s Kospi experiencing a significant drop of 3.27%. However, China’s SSE Composite stood out with an impressive gain, driven by new stimulus measures and positive sentiment regarding future growth prospects.
United States
Monetary Policy Easing on back drop of stable economy and declining inflationary pressure.
In September 2024, the U.S. Federal Reserve made a landmark policy move, cutting interest rates by 50 bps, reducing the federal funds rate to 4.75% - 5.00%. This marked the first rate cut in four years, signaling the start of a potential cycle of easing after more than two years of tightening monetary policy. Fed policymakers’ projections show a gradual path of future rate reductions, with the benchmark rate expected to fall by another 50 bps by the end of 2024, a full 100 basis point in 2025, and a final 50 bps cut in 2026, placing the neutral rate between 2.75% and 3.00%.
The U.S. economy maintained its momentum in Q2 2024, growing at an annualized rate of 3.0%, unchanged from the previous estimate. This expansion was significantly higher than the revised 1.6% growth in Q1, supported by an 8.3% increase in private inventory investment and a 4.3% rise in federal government spending. Inflation, a key factor driving the Fed’s policy decisions, continued to cool. The annual inflation rate fell for the fifth consecutive month, reaching 2.5% in August 2024, its lowest level since February 2021. The unemployment rate has fallen to 4.10% down from highs of 4.30%.
The U.S. housing market continues to be a focal point of economic interest, in August 2024, U.S. housing starts surged by 9.6% from the previous month to an annualized rate of 1.356 million units, well above market expectations of 1.31 million. This marked the sharpest increase in nine months, driven by a robust 15.8% rise in single-family home construction. Building permits, a leading indicator of future construction activity, rose by 4.9% in August to 1.475 million units, marking the highest level in five months. The Federal Reserve’s recent rate cut, is expected to alleviate housing market.
Summarizing, the Federal Reserve’s policy easing has been well-received by markets, providing a boost to economic growth while inflation continues to cool. The labor market remains strong, while the U.S. faces challenges in trade and manufacturing, the overall economic picture remains stable, supported by resilient consumer spending and a recovering housing market. Stay tuned for further US market updates as these dynamics evolve.
Euro Area & United Kingdom:
Continued monetary policy easing, declining inflation while Growth remains tepid.
The ECB, on September 18, cut its deposit facility rate by 25 bps to 3.5%, while lowering the main refinancing and marginal lending facility rates to 3.65% and 3.90%, respectively. This marked the second consecutive rate cut, signaling the ECB's intention to ease monetary restrictions as inflation approaches its 2% target. ECB policymakers emphasized that future rate decisions will be data-dependent, as the Eurozone continues to experience a challenging economic environment. Inflation in the Eurozone fell to 1.8% in September 2024, its lowest level since April 2021, down from 2.2% in August.
Eurostat's third estimate for Q2 2024 showed that Eurozone GDP grew by just 0.2% QoQ, with the same modest growth rate recorded across the broader European Union (EU). This followed a 0.3% expansion in Q1 2024. Government spending, saw a healthy uptick, rising by 0.6% in the Eurozone and 0.7% in the EU. The labor market in the Eurozone remains resilient, with the unemployment rate holding steady at a record low of 6.4% in August 2024.
Coming to the United Kingdom, the Bank of England (BoE) held its Bank Rate steady at 5.00% in its September meeting, following a 25-bps cut in August, which marked the first-rate reduction in over four years. Inflation in the UK remained stable at 2.2% in August, unchanged from July. The BoE expects inflation to rise slightly towards the end of the year, reflecting base effects from last year's energy price increases. GDP grew by 0.5% in Q2, slightly below the initial estimate of 0.60%, with household spending remaining weak and government spending contributing most to growth. The UK labor market showed signs of resilience, with the unemployment rate easing to 4.1% in the three months to July, down from 4.2% in the previous period.
Both the Eurozone and the UK are grappling with tipid economic growth and moderating inflation. Central banks in these regions have begun easing monetary policy, aiming to support growth without reigniting inflationary pressures.
Japan and China
Easing Monetary Policies.
Japan's economy continued to expand in the second quarter of 2024, though at a slightly slower pace than previously estimated. Japan's GDP grew at an annualized rate of 2.9%, down from the preliminary estimate of 3.1%. Japan’s unemployment rate fell to 2.5% in August, down from July’s 2.7%, with the number of unemployed individuals dropping by 150,000 to a seven-month low.
China, on the other hand, continues to struggle with slowing economic growth. In August, China’s industrial output grew by just 4.5% YoY, the slowest pace since March and down from July’s 5.1%. Retail sales also weakened, rising by only 2.1%, compared to 2.7% in July. This deceleration reflects ongoing challenges in China’s consumer sector, as slowing wage growth and rising living costs weigh on household spending. New home prices also declined further, reflecting continued weakness in China’s property market, a key pillar of its economy.
In response to these challenges, the People’s Bank of China implemented a series of stimulus measures. In August, the central bank cut the rate on one-year medium-term lending facility loans to 2.00% from 2.30%. This rate cut was followed by a reduction in the reserve requirement ratio (RRR) for banks by 50 basis points. This will release 1 trillion yuan ($142.5 billion) in liquidity into the banking system and was accompanied by a cut in the benchmark interest rate on 7-day reverse repurchase agreements by 20 bps to 1.50%. All these monetary policy measures triggered huge buying interest in Chinese equities by fund managers across geographies, not to forget they were cheapest on valuation matrix before the buying surge happened.
In both Japan and China, central banks are adopting increasingly dovish stances to address economic headwinds. Japan’s economic growth remains moderate, with inflationary pressures persisting, while China is grappling with a more pronounced slowdown in industrial activity and consumer spending. As both nations continue to implement policy easing, the outlook for growth in the coming months will depend on the effectiveness of these measures in spurring demand and stabilizing inflation.
India
High Valuation and Slowing Earnings growth key concern.
The Nifty 50 index, surged by 2.11% during the course of September, breaching the 26,000 level for the first time while surging to its lifetime high of 26,277.35. NIFTY took a 38-session stride to jump from 25,000 to 26,000; and SENSEX took a 1,000-point leap in just two sessions to scale the 85,000.
Retail inflation in India rose slightly to 3.65% in August, up from a five-year low of 3.54% in July. This marks the second consecutive month that inflation remained below the Reserve Bank of India’s (RBI) target of 4%, reflecting some relief for consumers amid elevated base effects in food prices. Wholesale inflation, as measured by the Wholesale Price Index (WPI), also eased to a four-month low of 1.31% in August, down from 2.04% in July. The decline was driven by deflation in fuel prices and a slower rise in food prices.
India's industrial activity showed mixed results, with the Index of Industrial Production (IIP) growing by 4.8% YoY in July, an improvement from the revised 4.7% in June. However, growth was uneven across sectors. Mining, manufacturing, and electricity grew at 3.7%, 4.6%, and 7.9%, respectively, with capital goods witnessing robust growth of 12%. Consumer durables, however, contracted by 8.2%, signaling weaker demand in the consumption-driven sectors.
India’s fiscal deficit for April-August stood at ₹4.35 lakh crore, or 27% of the budgeted estimate for FY25, reflecting stable public finances despite higher spending on infrastructure and social programs. The current account deficit (CAD) widened to 1.1% of GDP in Q1 FY25, up from a surplus of 1% in Q4 FY24, driven by the widening trade deficit.
The current account deficit remains manageable, supported by strong inflows from services exports and foreign direct investment (FDI). India's FDI inflows surged by 47.8% to $16.17 billion in the April-June quarter of FY2025, driven by investments in services, technology, and pharmaceuticals. Notably, Maharashtra, Karnataka, and Telangana were the top destinations for FDI, while inflows from major global economies like the U.S., Singapore, and the UAE continued to rise.
India’s long-term growth trajectory remains intact, in light of resilient domestic demand, strong FDI inflows and a stable fiscal position. Country is sufficiently cushioned to address any economic slowdown on back drop of strong tax collections, sufficient elbow room for interest rate cuts, robust forex reserves and contained inflation.
Conclusion
As we reflect on the global economic developments of the past month, it is business as usual for major economies. America and China are on path to stimulate their economies at a faster pace through monetary policy measures. In the Euro Area and the United Kingdom, economic growth remains sluggish, while inflation is moderating due lack of demand. India appears to be sweetly placed buoyed by strong domestic demand and moderating inflation.
We would like to take this opportunity to thank our clients and stakeholders for your continued trust in our services. Your confidence in our ability to provide timely insights and strategic guidance is what drives us to consistently deliver the highest level of service. As we move forward, we remain committed to providing you with the latest global market updates to ensure you are well prepared to navigate the complexities of global markets.
Thank you once again for your continued support.
Warm Regards,
Mr. Senthilkumar Naidu
Business Head, CSec