Economic data has been fairly light. We have the October inflation releases shortly and this is key. Commodities have fallen back with Oil dropping to as low as $75 pb. This implies better news ahead for prices but unlikely in the very short-term. We have had warnings, from some Central bank chiefs, inflation risk is still skewed to the upside - and so it is for interest rates as well. This has come from Fed Chair, Jerome Powell as well as ECB Head, Christine Lagarde. Norway had warned rates would have to rise and, inflation rise cements a December hike (following a pause last month). There was a stark warning from a famous Black Swan manager, Mark Spitznagel (of Universa Investments) that while stock markets are likely to surge for now, they will then turn down severely as the Fed cuts rates. His firm is a Tail Risk fund which is designed to protect investors when markets crash. Tail Risk profits from markets going sour – so there is a commercial angle here. However, his view is that not only will the Fed cut rates sharply but they won’t be able to continue with QT (Quantitative Tightening). The Fed’s balance sheet peaked at $9tn. It has since fallen to less than $7.9tn.
A Matthews Asia report commented on a recent trip to China and looked at the loss of confidence by consumers and entrepreneurs. Key points:
The government is acutely aware of this loss of confidence and has taken steps to restore trust. This loss of confidence stems from poorly explained and poorly implemented economic and regulatory policy changes by the government. Entrepreneurs, in particular, want the government to get out of the way. They also cited the property market downturn and tensions with the US as major concerns. The latter point might explain why there has been more communication / interaction between the two (US and China) of late in the hope it will lead to stabilisation. Xi is looking to calm foreign investors in an attempt to lure back FDI as the country recorded its first inward FDI deficit amounting to -$11.8bn. Western Execs are growing nervous of doing business. He is also seeking to end trade tariffs imposed by Trump in July 2018. Xi also wants to remove technology curbs. In return, it is aid Biden wants a resumption of military talks given how sensitive the South China Sea and Taiwan are. Biden is also believed to want a crackdown on Fentanyl (private Chinese firms export many of the chemicals used in creating it) and is seeking more cooperation from China in clamping down on this.
Despite the above, entrepreneurs remain determined to execute on their business plans.
While the economy is weak, it is not in crisis. The consumer part has performed well on the back of real per capita household income growth of +6% y/y in Q3. It was +21% higher than Q3 2019 (pre-pandemic). Retail sales are up +165, bar & restaurant sales +14%. Manufacturing has also recovered. Overall, a gradual recovery is underway.
Since July, the government has taken a series of incremental steps to restore confidence, particularly around property whose contribution to the overall economy has been declining for some years as property matures. Mortgage rates have been cut heavily from 0.73% to 1.42%. The residential property market is not in a bubble state – homeowner leverage in China is much less than in the US. Down payments average 30%
Overall, it’s about expectations. October’s imports unexpectedly grew +3.0% perhaps endorsing a slowly growing consumer appetite. Critically though, it’s about confidence. China’s fix is not a structural one – it’s a sentiment one and that’s not insurmountable!
For w/e 8th November, Global Equity Funds saw a significant pickup in inflows of a net $5.63bn. Europe drew $2.92bn and the US $1.9bn. Technology was standout with $1.3bn. MM funds saw net inflows of $53.75bn. Global bond funds drew $6.73bn with HY bond funds seeing net inflows of $6.43bn.