The summer period has coincided with a substantially bullish phase for international stock markets, allowing some indices to return to their all-time highs, such as the US S&P 500. Given the geopolitical context, characterized by all sorts of problems, an old Anglo-Saxon stock market adage has been confirmed: “the stock market climbs a wall of worry.”
This quote is not intended to be coincidental, as the long-awaited truce in hostilities in Gaza could be confirmed in the coming hours, not coincidentally exactly two years after the terrorist attack that triggered this tragic conflict. Thus, one of the main factors of international concern would partially disappear—the primary one, Ukraine, remains—but stock market prices will have to adapt to this positive development, certainly through a geographic and sectoral rotation of demand. Indeed, interesting opportunities lie ahead for countries whose governments will play a significant role in managing and thus rebuilding the area, while those who have benefited from the war economy will see their role diminished. In the heat of the moment, we could also see a brief weakening of the indices, discounting the new situation and take the opportunity to increase portfolios’ stock market exposure. Indeed, the dominant factor determining international stock market dynamics since the sharp correction in early April, triggered by the US Administration’s tariff decisions, has been the creation of monetary inflation by central banks and their respective Treasuries. In this regard, we are witnessing an interesting change of heart between the Fed and the PBOC, in that the former appears to have definitively embarked on a phase of systemic liquidity constriction, as evidenced by the decline in its balance sheet, albeit mitigated by ongoing purchases of US Treasury bonds. Meanwhile, since the beginning of the year, the Chinese central bank has finally, after much hesitation, been concretely addressing the problem of debt deflation accumulated over the past 20 years through a massive, covert liquidity creation projected at $1 trillion since year-end 2024. In practice, albeit somewhat belatedly, the PBOC has learned from Japan’s bitter experience of the late 1980s, when the strong yen exacerbated structural deflation for decades.
Certainly, the recent weakness of the dollar has facilitated the decision to abandon the policy of a stable yuan and focus on reducing the debt-to-GDP ratio through concrete monetary expansion. Given the size of the Chinese economy, the positive reaction of global stock indices, not just China indices, is not surprising. Domestic stocks have seen an annual gain of 16%, while Hong Kong’s Hang Seng Index has risen a staggering 35%.
Considering that, due to the opportunity afforded by Chinese companies facing geopolitical challenges, a significant portion of their international operations transits through neighboring countries, making their investments attractive on other major Asian stock markets as well.
Nicola Bravetti Data Source: Bloomberg
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