Good morning from Copenhagen,

The Chinese market is off to a poor start this Friday, reinforcing our view that China will prioritize artificially pushing growth at the expense of margins. This “growth at all costs” strategy, aimed at meeting ambitious targets, is a net negative for local equities as profitability takes a backseat to growth. The chart below highlights this dynamic: Chinese equities struggle to perform well despite efforts to meet growth targets because growth, regardless of its economic rationale, outweighs profitability in China’s current modus operandi.

Meanwhile, the EUR continues to weaken sharply, likely driven in part by the recent surge in natural gas prices. The market remains heavily short EUR and significantly long EUR fixed income. If natural gas prices keep rising, it could complicate the ECB’s ability to deliver rate cuts as aggressively as the market has priced in.

We are now back to anticipating a 50bps rate cut in the Eurozone in December, while the market remains undecided on whether the Fed will cut at all.

It is highly unusual for the ECB to move 50bps out of sync with its peers. Let me remind you that all key inputs to the ECB’s inflation forecasting process—wages, energy prices, and a weak EUR—point to inflation becoming a concern again in the forecasting process of the ECB.

Chart 1a: Chinese profits are on the floor