Equity and bond markets have moved slightly higher over the week
With the main excitement around the US (as ever) thanks to the main US equity index, the S&P500, closing at a record high last Friday, and seeing subsequent all-time highs every day so far this week. However, the index has failed to maintain the broad-based momentum that we saw at the back end of last year, with the heavy lifting being done by the “Magnificent 7” stocks, which performed so well for most of 2023. Indeed, at the last market high in early January 2022, all S&P sectors except energy were at an all-time high. This time, it is only the technology sector making record highs. Of those Magnificent 7, one is looking far less magnificent with Tesla now down 26% this year, not helped by this week’s poor earnings report and outlook. If we start hearing about the “Super Six” instead, you possibly heard it here first. For the market to reach fresh highs is impressive given the current backdrop, where expectations of interest rate cuts have been pushed further into 2024. Given that so much of the Q4 rally was based on the Fed “pivot” to looser monetary policy, for the market mood to be still positive as central bankers push back against imminent rate cut expectations is surprising.
Elsewhere, we did see a brief attempt at a rally in Chinese and Hong Kong equities after Bloomberg reported that Chinese authorities were considering a package of measures worth $278 billion to stabilise stock markets. We also learned that the Chinese Central Bank would be reducing the Reserve Rate Requirement for commercial banks next week – this will free up some liquidity, assuming there is any demand to borrow money. We have seen supportive measures for stock markets in China in the past from the “national buying team” of banks but such moves are unlikely to put a floor under markets in the absence of further measures. Despite an economy that grew at 5% last year, there remains a lack of confidence in the health of the Chinese economy, and this is reflected in market valuations. The Hang Seng index is now on a price to earnings (P/E) ratio of 8x. It’s ‘screamingly’ cheap but it seems investors are reluctant to add to the region in the absence of broader stimulus, policies to stabilise the property sector, and more clarity on interventionist government policies that have caused significant pain to stocks such as Tencent and Alibaba in recent years.
We saw the Bank of Japan and European Central Bank meet this week and while there were no policy changes, the ensuing press conferences gave some hints about potential future rate hikes. In Japan, rates were held at -0.1% but the press conference from Governor Kazuo Ueda was seen as slightly hawkish given that he said the certainty of achieving the bank’s price projections had continued to gradually increase. The consensus view remains that the Bank of Japan will gently tighten policy, via the removal of Yield Curve Control, and move towards positive interest rates. This is most likely to happen once they have more visibility on the outcome of the Shunto wage negotiations that will be held in March between major companies and trade unions which will set the tone for wage settlements across the wider economy.
The European Central Bank kept policy on hold as expected. ECB President Christine Lagarde said that the consensus “was that it was premature to discuss rate cuts” with a need to be “further along the disinflation process before we can be sufficiently confident inflation will hit the target in a timely manner”. Lagarde noted that with lower energy prices feeding into the inflation data and the economy “likely to have stagnated” in Q4 with further weakness in recent data, “price pressures would ease further over the course of the year”. The messaging was interpreted as dovish, and while expectations of a March rate cut are low, an April cut is now priced with a 93% probability.
The economic data has been headlined by the flash PMI numbers published on Wednesday. The numbers showed the UK economy to be picking up, while manufacturing remained in contraction. This was offset by a stronger reading from the services sector than expected, leaving the composite PMI comfortably in expansion territory and at its highest level since last June. The numbers were consistent with quarterly GDP growth of 0.2%. The equivalent data for the eurozone was less encouraging, with the composite PMI in contraction territory for the eighth consecutive month. The stagnation in the eurozone shows few signs of abating. In the US, the numbers for Q4 showed its GDP expanding at an annualised pace of 3.3%, well ahead of expectations. For 2023 as a whole, the economy grew by 3.1% which was quite a feat considering the low expectations at this time last year. The key lesson here is that governments will do whatever it takes to avoid a recession before an election. Hence the US budget deficit of 8% of GDP, though it has not yet seemed to help President Biden’s approval ratings.
Talking of politics, the New Hampshire Primary saw Donald Trump victorious over his sole remaining rival for the Republican nomination, Nikki Haley. Trump’s decisive victory, despite huge campaign spending by Haley, led to calls for Haley to withdraw from the nomination process, but the former South Carolina governor vowed to carry on beyond her home state Primary on 24 February to “Super Tuesday” in March. New Hampshire was probably Haley’s best chance of disrupting Trump’s momentum – Haley is polling well below Trump even in her home state of South Carolina. March seems a long way away given the momentum with Trump’s campaign and the building pressure on Haley to concede, though both Haley and President Biden will take some comfort from Haley’s large majority over Trump in New Hampshire among “independent” voters which is a reminder that Trump remains unpopular outside of die-hard Republican supporters.
Have a good weekend,
Regards,
Anthony.
Source for all figures: Bloomberg, as at 26.01.2024
