Global equity markets remained optimistic about China’s move to unlock some cities in a trial that could see further softening of the Zero covid policy pursued by Beijing.
With commodity prices consolidating at much lower levels that earlier on this year following the invasion of Ukraine by Russian forces, economists are adjusting their timing of peak inflation which is most cases has been brought forward to December or in Q1 2023.
Far East markets on Monday were firmer as more evidence emerges of further relaxation of the strict lockdown measures that have been in place across China. The Chinese trade data due out this Wednesday might confirm how badly the Chinese economy has been affected by these rolling lockdowns.
Review of last week’s key action
FTSE +70 +0.93% DOW +83 +0.24% S&P +46 +1.13% NASDQ +235 +2.1% DAX -12 -0.08% NIKKEI -505 -1.76% Hang Seng +1,102 +6.27%
UK and US equities responded positively to a speech by Jay Powell last Wednesday which confirmed the belief that the Federal Reserve (Fed) would start to slow the pace of interest rate rises.
The initial take on his speech was that it was quite hawkish as the Fed chairman reiterated the Central Bank’s strategy to complete the fight against inflation. What the markets noticed immediately was Powell’s comment “the time for moderating the pace of rate increases may come as soon as the December meeting.”
Expectations for a 0.5% rate hike instead of a 0.75% hike had been building for three weeks or more. The previous four moves had been 0.75% but it’s clear now that the markets think a 0.5% is most likely with a 78% probability at the close on Friday.
Last Friday the US markets had a to contend with a surprisingly strong non-farm employment data released by the Bureau of Labour.
Despite sharp rises in interest rates this year, employment has remained surprisingly robust which has created a dilemma for the Fed. In November new jobs totalled 263K, above the consensus number of 200K, whilst the previous month’s number was revised up 23K.
Perhaps even more concerning for the Fed was the jump in average earnings which came in far higher at 0.6% compared to the consensus of 0.3%. Equity markets swooned on the news but by the close both the S&P500 and the NASDAQ had clawed back all their losses following the release to leave the key indices up between 1% and 2% on the week.
In the UK the FTSE100 continues to outperform most European peers as resource sectors pick up steam as speculation builds regarding a wider relaxation of the Zero Covid policy pursued by Xi Jinping. The FTSE100 is now approaching the year’s high, achieved before the start of the war in Ukraine in early February.
The Hang Sang in Hong Kong also pushed higher on the back of the relaxation of some of the Zero Covid rules with the index up 6.27% last week.
EURUSD +1.56 +1.5% GBPUSD +2.00 ++1.66 USDJPY -4.84 -3.47%
The US Dollar falls over the past month reflect the expectation that the Fed will slow the pace of intertest rate rises. There is a high probability that the Fed will raise rates by 0.5% at this month’s meeting on the 14th of December. Speculation has started to build about the first cuts in rates by Q4 next year, but that is some way off with many possible outcomes to inflation and the state of the US economy after successive rate rises this year.
Sterling touched its highest level against the US Dollar since late June as the currency continues its rebound from the Truss induced slump.
Sterling also reached a three-month high versus euro as bond yields held onto gains over the past two weeks, despite the threats of wider industrial action and the impact of the economy at large.
The Japanese Yen staged a significant rally against the US Dollar, far outpacing other major currencies rally versus the US Dollar. The FT reported that there are signs that that Japanese institutions will start to invest more into their domestic market.
The immediate speculation was that investments from overseas would be repatriated and swapped back into Yen – hence the sharp appreciation last week. There has been no change in the Bank of Japan’s ultra-loose monetary policy which has been at odds with every other developed economy stance on inflation and interest rates.
Gold +2 +0.11% UK OIL -4.03 -4.59% US OIL -3.6 -4.44% Bitcoin unchanged
Oil responded to the rumours about a relaxation in the Zero Covid policy pursued by Beijing. In fact, those rumours proved correct as several regions benefited from a relaxation of strict lockdowns that had been in place. This is a trial but there remains concern that China has little natural immunity and given the relative low vaccination rates and poor effectiveness of the Sinopharm vaccine, China is at risk of a significant jump in infections and mortalities. Beijing is in a cleft stick but is showing some flexibility to an increasingly frustrated populace.
The agreement between the G7 economies on the $60 price cap for Russian oil comes into effect today or soon after according to a joint statement from the G7 and Australia.
The price cap means only Russian oil bought for less than $60 a barrel can be transported using G7 and EU tankers which will have the necessary insurance. For oil purchased above the price cap the transacting parties will struggle to get insurance for the cargo as most major shipping and insurance companies are based within the G7.
Data / events for the week ahead
A quieter week for data releases with few major releases ahead of the last FOMC meeting next Wednesday. The standout data / events being the Australian and Canadian rate decision and US services data.
Monday:
EU - Eurogroup meeting in Brussels. Price cap on Russian oil and other matters related to the energy crisis and war in Ukraine. To be followed by Ecofin meetings on Tuesday – this involves the Finance Ministers from EU member states.
US - Services PMI data. Holding up above 50 but data paints a weakening services sector.
Tuesday:
Australia - Reserve Bank of Australia policy meeting. A hike of 0.25% in interest rates expected. The bank signalled a slow pace several weeks ago despite being late to start raising rates compared to other central banks. AUD and Australian equities sensitive to this release.
Wednesday:
Canada - Bank of Canada policy meeting. Like the RBA, rates in Canada are expected to rise another 0.25% to 4%. CAD sensitive to this announcement.
Thursday:
Eurozone - Christine Lagarde speaking at Systemic Risk Board event. Crypto a topic?
Friday:
UK - Consumer inflation expectations. An interesting number that can be a leading indicator to future inflationary trends.
US - Core PPI. Producer Price index. This is the rate of change in the costs of goods and services going into production. A key pointer to future inflation.
US - Prelim University of Michigan Consumer Sentiment. A happy consumer is a happy economy. The first reading of consumer sentiment in November – there have been signs of an uptick over the past two months with the consensus for this reading unchanged from last month.
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