There does not appear to be too much rhyme or reason to move the market today; pre-Lunar New Year is typically a low liquidity period for Asian assets, although it is hard not to be bullish across the region based on the improving economic landscape. Hence some tiny buy orders coming down the pipe could be enough to keep the market buoyant.
Still, I suspect some trepidation at these overbought CSI300 and HSI levels as consumption and property are where the post-Lunar New Year (LNY) recovery path is most uncertain.
The policy tone has been unmistakable “pro-growth” of late. But pro-growth in this cycle means easing barriers of entry and reducing policy restrictions rather than turning on the stimulus taps. The street is starting to position for policy normalization on that front after a very accommodative 2022.
Structurally the Chinese economy faces numerous headwinds, but for now, the reopening is in the driver’s seat for the Chinese economy and markets in the coming quarters.
While investors feel more certain about the trajectory of China markets, US markets are a completely different kettle of fish.
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While US Indexes will likely chop around ahead of the Fed, a market where traders make money and investors get bored, it’s hard not to position for things to get particularly ugly before getting better. One look at the cost to protect against default on US debt is enough to scare the bejeebers out of the most steely-eyed trader.
The strength of the labour market, plus the fact that the peak policy drag is happening now, suggest that the second and more challenging leg of getting core inflation to the fed’s mandate will be excruciating for US growth as central banks are likely to keep rates at these higher levels for longer and hike more if necessary. So, we should not expect immediate and aggressive rate cuts soon after we reach the terminal rate in this cycle. Indeed, this could be the “new, new normal.” After all, it is a central banker’s dream because they can successfully escape the zero rate / QE environment and have significant room to cut when they eventually need it.
Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT
