WeekWatch -‘Equity markets trended higher last week’ November 22
Equity markets trended higher last week, as investors were allowed a sliver of optimism around the future of the global economy.
Recent data for factory gate prices and shipping rates have shown falls in prices from their COVID-19 related peaks. Constrained supply chains have been one of the key causes of high inflation this year, so if these begin to ease, inflation may begin to fall as well.
For example, Capital Economics calculated that if shipping costs were to remain stable, this could reduce the overall level of inflation by 0.3% in 2023 (due to the fact 2023 inflation will be calculated against the already high 2022 levels). However, shipping rates falling, as they are currently doing, could lead to a 0.5% drag on inflation.
Adding to this sense that inflation may have peaked, oil prices declined for a third consecutive week, as growing demand concerns relating to China continued to weigh on sentiment. China, the world’s largest importer of oil, experienced record daily COVID-19 cases throughout last week which led to a return of strict restrictions for a number of key cities across the country. This has sparked concerns that there could be a further slowdown in Chinese economic growth which would be an additional hit to oil demand alongside global recessionary fears.
While these lockdowns would have previously hurt Chinese equities, last week the Shanghai SE Composite actually increased slightly (0.14%). Chinese equities holding their value despite more COVID-19 related lockdowns and signs of wider economic slowdown could suggest that a lot of this bad news has already been factored into their prices. With anti-lockdown protests in major cities across the country over the weekend, this theory will likely come under scrutiny as the week progresses.
With inflationary pressures beginning to ease, eyes have also turned to central banks to see how they will react. US and European central banks have spent much of 2022 raising interest rates from their COVID-19 lows. The US Federal Reserve has led the way, repeatedly lifting its central rate 0.75% throughout the year.
Last week, however, it indicated that it may be about to slow the pace in the near future. Minutes released last week indicated that a 0.5% increase could now be expected next month. This was enough to lift global equity markets.
In the US, which had a shortened trading week for the Thanksgiving holiday, the S&P 500 rose by 1.5% to close the week above the 4,000 mark for the first time since September, while the NASDAQ ended the week up 0.7%.
This positive feeling spilled into Europe, where the FTSE 100 grew 1.37% and the MSCI Europe ex. UK increased 1.43%. The coming week will see European inflation figures released, which markets will be keeping a close eye on.
While investor sentiment is improving, it’s important to retain a grounded outlook. As David Bowers, from Absolute Insight notes: “Equity gains in recent weeks suggest investors believe a shift from rapid tightening (0.75% per meeting) to a slower pace (0.50%), may soon signal a Fed pivot. We don’t think that is the case. The real pivot comes, on the most generous interpretation, when rates stop rising, and more realistically, only once the Fed starts cutting rates. Divining precise historical pivot points is something of a ‘dark art’.”
Similarly, Bluebay’s Chief Investment Officer Mark Dowding warned: “We ourselves are nervous that a more dovish outlook has been priced prematurely and with financial conditions noticeably easier than they were before the time of the last Fed meeting, when they hiked by 0.75%, there is a risk that markets could be disappointed by the FOMC into the end of the year.”.
Bluebay is a fund manager for St. James’s Place.
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