Financial Markets

The conditions for a sustainable rally in Chinese stocks have not been met. In this report we discuss the four signposts which we will closely monitor to gauge when it will be warranted to upgrade our stance on Chinese equities both in absolute terms and relative to the global stock benchmark.

The decline in the US CPI is a tailwind for European stocks, but does it compensate for weaker global growth?

Stocks will only get temporary relief from gridlock. Inflation will abate but then remain sticky. US and global policy uncertainty and geopolitical risk will remain historically high.

A client concerned about the slump in asset prices, the stubbornness of inflation, and rising bond yields asks what went wrong, and what happens next? This report is the full transcript of our conversation.

While there is much variability in company profitability, earnings contractions have commenced and appear to be broad-based. We expect earnings growth to deteriorate further into year-end. Companies are reporting concerns about the trajectory of future economic growth and the uncertainty that it brings. Consumer spending on goods has slowed sharply, while spending on discretionary services has surprised on the upside. Business-to-business spending is still strong.

As the FOMC explicitly acknowledged this week, monetary policy operates with substantial lags. We see the risks to stocks as tilted to the upside over the next 6 months but are neutral on global equities over a 12-month horizon.

Provided that US inflation is due to excess demand rather than supply constraints, demand destruction will likely be needed to bring core inflation below 3.5%. Such growth contraction is positive for counter-cyclical currencies like the US dollar. In China, the Party's focus is to alleviate structural inequality and a long-term confrontation with the US; and authorities are not yet panicking about the cyclical state of the economy. Hence, an economic recovery is unlikely in the coming months.

Older workers have deserted the labour force in the US and the UK, but not so in the Euro area and Japan. The result is that wage inflation is red hot in the US and the UK, but not so in the Euro area and Japan. Hence, the Bank of Japan is right to remain a lone dove, the ECB must pivot from its uber-hawkish stance quite soon, but the Fed and the BoE must not pivot from their uber-hawkish stance too soon. We go through the major investment implications.

This week’s report examines the state of the global monetary tightening cycle and addresses some frequently asked questions about the Fed’s QT program. New yield curve trades are recommended for the US and German yield curves.

This Fed is a single mandate Fed which won’t consider the job done until inflation reaches a 2% target. Concerns about slowing growth will displace concerns about inflation. Equities will bottom shortly before economic growth bottoms. Until then we recommend a defensive portfolio tilt, and offer a few tactical and strategic ideas for the overweights.