Market Update: Diverging paths accompanied by seasonally scary messages

Before suspecting that markets have lost their fear of higher interest rates all of a sudden, we need to extend our horizon Eastward. Persistent rumours about the nearing of an end to China’s zero COVID policy had gotten investors very excited, and led to a 10% rebound in Hong Kong’s stock market during the week. This reminded us of the strong market rally that accompanied the post- COVID re-opening phase in Europe and the US in the Spring of last year.

This positive momentum had already spilled over to European markets, further buoyed by better than expected (or less bad) corporate earnings numbers. Meanwhile back in the US, once the gushing profits of the energy sector are subtracted, earnings declines have accelerated. Half-way through this quarter’s corporate earnings announcements, it must be acknowledged that the global picture confirms that recent worldwide economic weakness has hit earnings and will continue hitting revenues through the next few months at least. While not great news in terms of that fundamental underpinning of stock markets, this undeniable sign of slowing activity also tells investors the drivers of persistent inflation are abating, and with them the pressure on central banks for more tightening.

This would explain the diverging central bank messaging on either side of the Atlantic. In the US the economy and the jobs market have proved resilient enough to discourage the Fed from easing- off its pressure in the interest rate brake. Meanwhile, across Europe and the UK, household’s higher energy and mortgage expenditures are increasingly seen as potentially destroying more discretionary demand than may be necessary to bring inflation back under control. Judging from the BoE statement, concern is also making the rounds that the economic contraction may become so painful it could hamper its ability to keep public support for its actions onside.

The divergence of central bank policy after the extraordinary policy convergence since the beginning of the year, makes forward market assessments ever harder, because it is likely to keep the US dollar on its upward trajectory, or at least stronger for longer. At the same time, the prospect of a return of Chinese consumers to the global demand equation has to be an overall positive, even if oil prices rose in the wake of the good news. We also note the divergence between the US mega cap tech darlings of the pandemic period and the non-tech sectors in the US, with the NASDAQ being the only index to have persistently lost recently.

The coming months are going to be tough for the global economy, as central banks raise rates incrementally and energy prices remain too high. Markets are beginning to spot the tell-tale data points of historic triggers of market sentiment turning point. However, even if these data points cause temporary market sentiment upswings, as long as this weaker growth picture remains accompanied by inflation driven by more than just higher energy costs, we are not out of the proverbial woods.