THE Bears left Goldilocks three bowls of porridge—too hot, too cold, and one that was just right. Not a bad analogy for today’s global bear market in equities.
Still too hot?
The market that’s been too hot to be comfortable in recent weeks has been the US, where a buoyant job market provided the Federal Reserve with perfect cover for a full-throttle attack on America’s sky-high inflation problem. Last week there was a glimmer of hope that money printing might ease over the next year. A Wall Street Journal article suggesting a slower rate hike from December may point to a slightly lower peak than the 5% currently priced into futures markets.
The Fed has already hiked rates by an above-average 0.75% three times in a row, so anything less would be welcomed by the market in December. Last week, investors began betting on this exact result, with sharp rises in three of the five trading sessions. For the week as a whole, the S&P 500 was up 4.7% and the tech-heavy Nasdaq, which is particularly interest-rate sensitive, was up 5.2%.
Too cold
The Chinese stock market and its close neighbor Hong Kong started the week firmly behind. The Hang Seng index fell 7% this morning as investors began to digest the fallout of the Communist Party’s 20th Congress, where President Xi Jinping cemented his position as the most powerful leader since Mao’s death in the mid-1970s .
A third term was already priced in for Xi. What surprised the market more was the composition of the Politburo of high-level members around it for the next five years, indicating a continued focus on social stability and less on economic growth. In particular, comments on China’s zero-Covid policy suggested Beijing’s approach to the virus is unlikely to ease off, at least for the next year. Also worrying for markets was this morning’s delayed GDP figure, which showed growth of 3.9%, well below the authorities’ target of 5.5%.
Precisely?
Meanwhile, the big market story at home is the quick fix of the Conservative Party leadership struggle sparked by Prime Minister Liz Truss’ resignation last Thursday after less than seven weeks in office. Markets hailed the smooth transfer of power to Rishi Sunak after Boris Johnson ruled late Sunday that he did not have enough support from MPs to stage a realistic challenge to his former Chancellor and Penny Mordaunt’s last-minute resignation on Monday. A strengthening pound and lower gilt yields signaled market relief that some degree of stability had been restored.
All eyes are now on next week’s budget, which, in contrast to September’s ill-fated mini-budget, is backed by economic forecasts from the Budget Responsibility Office. The challenge for anyone who is Chancellor by next Monday will be to fill a £40bn hole in public finances, even after Jeremy Hunt’s dramatic reversal of most of the mini-budget measures just a week ago.
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