Global stock markets are breaking records due to stimulus measures in China and rate cuts in the West

Last week, stock prices on global markets rose as investors expect further interest rate cuts in Western countries, as well as an acceleration of growth in the Chinese economy following new stimulus measures.

On Wall Street, the Dow Jones rose 0.6% last week to a record 42,313 points, while the S&P 500 also increased by the same amount, reaching 5,738 points. The Nasdaq index, on the other hand, strengthened by 0.95% to 18,119 points. A positive sentiment has prevailed on the largest stock market for weeks, with indices hovering around record levels, as the US central bank recently began a cycle of interest rate cuts, which should stimulate economic growth.

Investors believe that the Fed has managed to curb inflation without triggering a recession. The thesis of a ‘soft landing’ for the economy has been supported by all recent macroeconomic data. Thus, the second estimate showed that in the first quarter, the gross domestic product (GDP) grew by 3% year-on-year, almost the same as the first estimate.

With good labor market data released, investor fears of a sharp slowdown in economic growth have subsided. Among the biggest winners last week was the mining sector. This is due to a strong rise in commodity prices as investors hope for increased demand and accelerated growth in the Chinese economy, the world’s largest consumer of raw materials.

Namely, Chinese authorities have introduced new monetary and fiscal stimulus measures, the largest since the pandemic, to support economic growth and curb the crisis in the real estate market. Thus, authorities have lowered interest rates and reserve requirement ratios for banks to encourage lending, and thereby boost consumption and economic growth. They have also announced the injection of substantial funds into state banks.

Thanks to this, stock prices on Chinese markets jumped between 13% and 16% last week, marking the largest weekly gain for the Shanghai stock exchange since 2008, and for Hong Kong since 1998.

European stock prices also rose last week, with the STOXX 600 index of major stocks reaching record levels. The London FTSE index rose by 1.1% to 8,320 points, while the Frankfurt DAX jumped 4% to 19,473 points, and the Paris CAC increased by 3.9% to 7,791 points. Besides the stimulus in China, the strong rise in indices is also attributed to easing inflation in some eurozone member states, including France, which opens the door for further interest rate cuts by the European Central Bank to stimulate economic growth.

Tightening policy in Japan

The dollar index, which shows the value of the US dollar against six major world currencies, weakened by 0.3% last week to 100.42 points, close to its lowest level in over a year. Meanwhile, the euro’s exchange rate against the dollar remained almost unchanged at $1.1162.

However, the US currency weakened against the Japanese yen by 1.1%, sliding to 142.20 yen. During the week, the dollar index fell to just 100.15 points, the lowest level since July last year, but later recovered somewhat. The weakness of the dollar is a result of expectations that the US central bank, after a recent interest rate cut of 0.50 percentage points, will continue the cycle of cutting the cost of money in November – by at least 0.25 percentage points.

The dollar did not significantly weaken against the euro as it is also expected that the European Central Bank will soon again, for the third time this year, cut rates by an additional 0.25 percentage points. This is expected because inflation in the eurozone is gradually easing, which opens up space for stimulating the economy, which is not in the best shape.

While it stagnated against the euro, the dollar significantly weakened against the yen as it is expected that the Japanese central bank will soon further tighten monetary policy.

There have been speculations about this for some time as inflation in Japan has been rising for months, but these speculations have been further strengthened after former defense minister Shigeru Ishiba won the elections for the leader of the ruling Liberal Democratic Party (LDP). Ishiba is on track to become Japan’s new prime minister, and he is known, among other things, for being a strong critic of recent monetary stimulus, recently stating that the central bank is on the right path with tightening monetary policy.