The FTSE 100 soared on Wednesday as London’s China-focused contingent reacted to the news China had slipped into deflation as consumer prices fell.
Chinese CPI inflation in the year to June fell to -0.3%. This compares to 7.9% in the UK and a consensus US CPI of 3.3% in the year to July, due to be released on Thursday.
Deflation is bad news for the Chinese economy, and investors are once again hoping China will announce fresh stimulus. If deflation is left unchecked, it will pile pressure on businesses and curtail already slow Chinese growth.
Where other countries are fighting #inflation, #China has entered full #deflation mode!#CPI -0.3%#PPI -4.4% pic.twitter.com/PFrPl1lUK3
— jeroen blokland (@jsblokland) August 9, 2023
There is a sense of fatigue in markets related to persistently disappointing Chinese economic data which is morphing into hopes the Chinese authorities will soon act to stimulate the economy. Should China unleash a wave of stimulus, the FTSE 100 will be a beneficiary.
“The market has spent so long fretting about inflation it feels discombobulating to suddenly switch attention to deflation,” said AJ Bell investment director Russ Mould.
“Given the broader disinflationary impact on the global economy though, these latest figures may give central bankers in the US, UK and Europe pause for thought when they weigh up their next steps. They cannot afford to repeat their earlier complacency over surging prices but they will want to avoid overdoing it, inflicting too much economic damage and perhaps being forced to undo their hard work by cutting rates before they’re ready to.
“Interestingly the FTSE 100 was higher this morning with firms whose fortunes are traditionally tied to China enjoying gains, perhaps amid hopes of further Chinese stimulus to get the economy moving.”
FTSE 100 movers
The companies suffering the most yesterday were at the forefront of today’s rebound. abrdn was 2.5% higher as bargain hunters stepped in after a 10% selloff yesterday.
Miners Glencore and Antofagasta rose on China stimulus hopes while BP and Shell ticked higher in line with oil prices.
Hiscox was the FTSE 100’s top faller on Wednesday despite reporting a ten-fold increase in profits. Hiscox shares were down 6% at the time of writing.