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Since the beginning of the year, most markets around the world have continued to decline, and major markets in Europe and the United States have shown a trend of “double killing” of stocks and bonds. Since the beginning of the year, the three major U.S. stock indexes have fallen from their historical highs. Among them, the S&P 500 has fallen by 7.7%, the Nikkei 225, the Korea Composite Index and other stock indexes have all fallen by more than 4.0%, and French, German stocks and other stock markets have recorded declines to varying degrees; The 2-year U.S. bond yield exceeded 1.0%, and the German 10-year bond yield turned positive for the first time since 2019. The Chinese stock market continued its adjustment trend since mid-December last year, with the Shanghai Composite Index down about 3.0% year-to-date. From the perspective of the performance of the stock market sector, stocks in the technology sector have fallen relatively deeper. Since the beginning of the year, the Nasdaq Index and the domestic ChiNext Index have fallen by nearly 12.0% and 8.7% respectively, far exceeding the S&P and Shanghai Composite Index. At the same time, the hot spots in the market rotate rapidly, and the trend lacks a clear main line. In particular, the recent increase in China’s policy to stabilize growth and the US company’s huge acquisition of Activision Blizzard seem to have a limited impact on the market. What caused the poor start to the global market, what are the opportunities for the stock market this year, and what will happen to the commodity and foreign exchange markets?
The recent performance of the global market mainly reflects the market’s concerns about the tightening of financial conditions and the prospect of global economic recovery.
On the one hand, concerns about the rapid tightening of financial conditions will trigger a revaluation of financial assets. Data show that in December 2021, the U.S. CPI rose to 7.0% year-on-year, hitting a 40-year high in the United States. The unemployment rate continued to fall, real estate was in short supply, and the manufacturing and service industries maintained a high degree of prosperity, indicating that the economy is still recovering. The Fed’s policy meeting and the recent statements of relevant officials suggested that the pace of Fed policy tightening was faster than previously expected, the market responded in advance, investors sold US bonds, market interest rates rose rapidly, and the attractiveness of high-valued risk assets declined, especially in the past two years. There have been many profit-making technology sectors and individual stocks. Some investors chose to stay on the sidelines temporarily, and the financial environment has tightened significantly.
On the other hand, the outlook for global economic recovery remains uncertain. The peak of the new round of the epidemic in the United States has not yet arrived, and the mutation of the virus has made the global epidemic prevention situation very unstable; the large-scale fiscal stimulus policy in the United States has withdrawn, supply bottlenecks and high inflation, the market is worried that the Fed will accelerate the pace of tightening, and interest rates will rise too fast. Investment demand constitutes a restraint; coupled with the new downward pressure on the Chinese economy, investors are worried that the global economic slowdown is more than expected. As of now, there are still more than 3 million jobs in the United States that have not yet been filled (relative to 2019), and since the past two months, the decline in new non-agricultural jobs in the United States has exceeded expectations, and the number of people applying for unemployment benefits has increased that week. It reflects that the improvement momentum of the US job market has weakened; the epidemic in the United States is out of control again, and the normal operation of the service industry such as aviation tourism, catering, hotels, education and leisure has been impacted again; at the same time, the large-scale domestic demand stimulus policy in the United States has withdrawn, and the overall savings of residents has fallen rapidly. In addition, factors such as high prices and limited supply may weaken the momentum of household consumption expenditure.
In addition, for some emerging markets, the pressure they face is not small, the global epidemic is still spreading, supply bottlenecks, weak domestic demand growth, uncertain overseas demand prospects, coupled with the potential spillover effect of the Fed’s tightening policy, and the beginning of the year The sluggish performance of European and American stock markets since then has had a negative impact on investor sentiment in emerging markets.
From past experience, the Fed’s rate hike cycle has a clear “positive correlation” with the trend of U.S. stocks, but this is premised on the fact that the Fed’s rate hike is accompanied by the steady expansion of the U.S. economy, and corporate profits can fully cover the rising pressure of capital costs. Business conditions continued to improve, private sector investment was active, employment and income steadily improved, the economic outlook remained optimistic, companies and households were willing to increase leverage, and market risk appetite recovered.
However, if the economic data released by the United States is not satisfactory, the economic slowdown exceeds expectations, and the aggressive policy of the Federal Reserve leads to the rapid tightening of the financial environment and the decline of corporate profit prospects, the pressure on the currently high valuation of US stocks will continue to increase. Short-term investors are cautiously trading this “uncertainty”, and the market is more inclined to wait for further clarity on the global economic and policy outlook.
Can Fed policy ‘wrong’? It is possible in the current complex global economic environment, mainly because the global epidemic situation is still evolving, and it is difficult for the Federal Reserve to accurately predict the development trend of the epidemic on the global supply chain, economy and inflation path. In addition to demand, US inflation is more affected by the supply chain. Influenced by factors such as disruptions, energy, raw materials, and labor market distortions, if the Fed tightens policy too quickly, it may have a higher effect on employment and domestic demand than inflation, and may lead to chaos in the global market, which the market does not want to see. arrive.
In the current complex short-term environment, what will the global market do?
Stock market – Global fundamentals and policies continue to be favorable to the stock market. There is no systemic risk in the stock market as a whole. It is expected that the stock markets of major economies will be optimistic this year. On the one hand, the probability of derailment of the global economic recovery is low. Despite the global mutated virus, supply bottlenecks, the withdrawal of stimulus policies from the United States and Europe, rising prices of food, energy and raw materials, and debt pressures of various countries, the global economy is likely to slow down, but from the slow improvement of global employment, the policy of spending and domestic demand has converged rather than reversed, especially China has successively introduced a series of policies to stabilize growth. The effect is gradually showing, and the economy is expected to operate within a reasonable range. The global economic growth this year will slow down, but it will not deviate from the recovery track. On the other hand, global liquidity remains loose. Currently in the initial stage of the normalization of the Federal Reserve, the current balance sheet of the Federal Reserve is close to 9 trillion US dollars, which is almost double the period of the last round of the most accommodative policy; the economies of Europe and Japan are still in the recovery period, which means that the monetary policy will continue to expand, Europe and the United States, etc. The real interest rates of major economies are still in the negative region, and the market will not be obviously “short of money” this year. However, market differentiation is inevitable. Global capital is more inclined to flow into markets with good epidemic prevention situation and certain economic recovery prospects, while stocks in sectors with solid fundamental support, certain profit prospects and reasonable valuations are relatively more favored by investors.
To a certain extent, this can explain the continuous adjustment of major global stock markets since the beginning of the year, but the market has not fallen into panic, and the recent northbound funds have increased their positions in the domestic stock market against the trend. Since the beginning of the year, market volatility is more inclined to build momentum for the follow-up.
Commodities – Short-term commodity market volatility did not change the trend and fell back. This round of rising commodity prices is mainly driven by the epidemic and the unprecedented scale of fiscal and monetary stimulus policies of European and American economies. With the policy shift of the Federal Reserve, the number of economies raising interest rates around the world is increasing, which indicates that the most loose phase of global liquidity is over, which will weaken the Commodity financial properties. Up to now, the prices of raw materials and commodities such as energy and base metals are still at historically high levels, some of which are at a ten-year high level, far exceeding the affordability of the manufacturing sector. This situation is unsustainable. From the perspective of supply and demand, the major global shipping indices have fallen from high levels in recent months, and the manufacturing PMI indices of major economies have continued to expand, showing signs of recovery in the global supply chain. At the same time, vaccine promotion, improved commodity production and logistics, coupled with Chinese commodity The package of measures to ensure supply and stabilize prices will continue to play a role, and the prices of most industrial raw materials will show a trend of falling from high levels. However, the slope of the commodity price curve is affected by the global epidemic prevention and supply chain.
Exchange rate – The US dollar is expected to remain strong, while the RMB exchange rate is slightly weaker. Compared with 2021, the macroeconomic policy environment at home and abroad has changed, and the corresponding foreign exchange market trends will also be adjusted accordingly. The overall environment is favorable for the U.S. dollar. On the one hand, the Federal Reserve is accelerating the recovery of excess liquidity, and the rise in U.S. bond yields is good for the U.S. dollar. Policy gaps tend to narrow, as well as the U.S. economy and market volatility may restrict the dollar’s upside.
For the RMB, compared with last year, the global dollar liquidity margin has converged this year, and China’s foreign trade and trade surplus has gradually returned to normal. It is expected that the RMB exchange rate will be revised in the direction of depreciation. However, considering the overall improvement of China’s epidemic prevention situation, the fundamentals are stable; the flexibility of the RMB exchange rate has been significantly enhanced; RMB assets have long-term allocation value, and the upward momentum of the US dollar is expected to remain moderate. The RMB exchange rate is expected to remain within a reasonable range that matches the fundamentals, and two-way fluctuations will be normalized.
(The author is a macro researcher of the Financial Market Department of China Everbright Bank. This article only represents the author’s point of view. The editor-in-charge email: [email protected])