Five things to watch in markets in the week ahead
China’s economy is losing momentum just as trade tensions with the United States intensify. Third-quarter GDP expanded 4.8% year on year, down from 5.2% in the prior quarter, signaling a loss of steam across domestic demand. The slowdown comes as Beijing faces the delicate task of sustaining growth near its 5% annual target while preserving leverage in tariff negotiations with Washington.
The deceleration is not dramatic, but it exposes the fragility of China’s post-pandemic recovery. Industrial output rose 6.5% in September, buoyed by exporters rushing orders ahead of new U.S. tariffs, yet the domestic side remains weak. Retail sales grew only 3% year on year, a sharp contrast to the government’s hope for a consumption-driven rebound. Falling property prices and a 13.9% drop in property investment over the first nine months have deepened the drag on household confidence. Deflation adds to the challenge, as consumer prices barely moved and factory-gate prices have fallen for four consecutive years, compressing corporate margins.
This imbalance has direct implications for markets. Chinese equities turned lower after the data, with the CSI 300 slipping 1.4% intraday before trimming losses into the close. Mainland sovereign yields edged lower, with 10-year notes down about 4 basis points to 2.16%, reflecting expectations of further targeted easing. The offshore yuan weakened toward 7.35 per dollar, its softest level in three weeks, as traders priced in a slower policy normalization path. Commodity markets reacted with a mixed tone: copper slipped 1.1% on concerns about construction demand, while gold gained roughly 0.7% to $4,230 per ounce as investors rotated toward safe-haven assets amid renewed trade tension.
The policy outlook now hinges on how Beijing calibrates stimulus without triggering financial instability. Incremental easing through local bond issuance and selective credit support is likely, but large-scale stimulus remains off the table. Policymakers are prioritizing structural reform in high-tech industries and curbing “involution”—the price wars and excess capacity that keep inflation low. That approach could stabilize supply chains and long-term productivity, though it risks keeping near-term demand subdued. The labor market remains a political priority: the urban unemployment rate eased to 5.2%, but youth unemployment, at 18.9%, underscores the strain on new entrants.
The base case is that China will maintain growth near 5% this year, supported by moderate fiscal spending and a softer yuan that cushions exporters. However, if U.S. tariffs broaden or domestic deflation persists into early 2026, growth could dip below target, forcing policymakers to expand stimulus measures. Investors should watch upcoming credit data, PMI releases, and trade numbers in November for confirmation of whether the third-quarter weakness is transient or structural.
For global portfolios, the takeaway is that China’s slowdown will reverberate through commodities, EM FX, and global bond markets. A weaker yuan tends to tighten financial conditions across Asia and suppress risk appetite, while falling import demand can weigh on oil and industrial metals. Positioning should balance exposure: favor quality exporters benefiting from currency softness and avoid sectors tied to the property cycle. The key risk is that policy restraint lags behind the loss of momentum. A decisive shift toward stronger fiscal and monetary coordination would be the signal to turn more constructive on Chinese assets.