Europe’s luxury goods market braced as China demand stays slow

China’s consumer prices rose by 0.6% year-on-year in August, falling short of the expected 0.7% but showing a slight improvement from the 0.5% rise in July.

However, factory gate prices, as measured by the Producer Price Index (PPI), remained in deflation, dropping by 1.8% compared to a year ago, exceeding the estimated 1.5% decline and following a 0.8% decrease in July.

The data indicates that China’s economic recovery continues to falter, largely due to the downturn in the housing market and the lingering effects of prolonged Covid-related restrictions.

China’s Gross Domestic Product (GDP) grew by 4.7% in the second quarter at an annualised rate, weaker than the forecasted 5.1% and down from 5.3% in the first quarter.

A week ago, China also reported a weaker-than-expected Manufacturing Purchasing Manager Index (PMI), which has contracted for the fourth consecutive month.

These figures put China’s 5% growth target for 2024 under increasing pressure, prompting several institutions to downgrade their forecasts.

UBS now expects the country’s economy to grow by 4.6% this year and 4% in 2025, compared with previous projections of 4.9% and 4.6%, respectively.

European luxury brands and mining stocks face pressure

China’s sluggish consumer demand has been significantly affecting major sectors in European markets, particularly luxury and mining stocks.

While Wall Street’s rout triggered a broad-based selloff in global markets last week, European luxury consumer stocks experienced the sharpest declines, driven by analysts’ downgrades amid the cloudy economic outlook in China.

Notable European luxury brands, including LVMH, Hermès, Christian Dior, and Kering, have slumped between 7% and 12% over the past week. In the past six months, LVMH and Kering have seen their market valuations drop by nearly a third and half, respectively, as China’s economic slowdown continues to weigh on sales revenue.

European mining stocks have also been badly hit by a slump in base metal and critical mineral prices, particularly in copper and iron ore.

Shares of Rio Tinto, Anglo-American, and BHP fell by 14% over the past three months, with China’s sluggish demand – driven by its ongoing property market crisis – being the primary cause.

The performance of mining stocks is often closely linked to price movements in their major products, with copper and iron ore being the key outputs of these large miners.

The downtrend in these growth-sensitive commodity prices may persist, adding further pressure to mining stocks.

In early Asian trading on Monday, Singapore Iron Ore futures (SGX TSI Iron Ore 62%) fell to just above $90 per metric tonne, the lowest level since November 2022.

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Copper futures on COMEX also declined to a one-month low.

China’s measures to strengthen economic growth

Amid ongoing sluggish household spending, China has been intensifying efforts to stimulate its economic growth.

In July, the People’s Bank of China (PBOC) unexpectedly cut two key benchmark interest rates by 10 basis points, alongside a reduction of the seven-day repo rate from 1.8% to 1.7%.

These rate cuts followed the Third Plenum, a crucial event shaping China’s economic strategy for the next five years.

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According to a report by Bloomberg, China is considering allowing homeowners to refinance home loans worth up to $5.4 trillion (€4.9 trillion), in an effort to unlock consumer spending power.

In May, the PBOC removed the floor on mortgage rates and reduced downpayment requirements. The central bank has also supported state-owned firms with 300 billion yuan (€38 billion) to purchase excess property inventory from developers.

Mike Henry, CEO of BHP, the world’s largest miner, remarked after the company’s earnings report in August: “The government has enacted policies recently that are meant to support the property sector … We expect that we could see a turnaround in the property sector in the year ahead.”

Markets will now turn their attention to upcoming Chinese economic data, including new Yuan loans, trade balance, retail sales, industrial production, and fixed asset investment, which are all set to be released later this week.

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