A month to go for the year and the bottom line for investment markets is that nothing much has changed – short term risks remain high and that could see share markets continuing to trade erratically.
The Fed’s thinking still dominates and that means US interest rates will continue to rise and in turn that means the value of the US dollar will impact investor thinking about value – even as the greenback falls slowly amid lingering fears of a US/global recession continue.
Markets, though, are now entering a happy time – the seasonally strong end of the year for shares.
Strategists want to see shares rally into January, ease going through February and remain above the recent lows and then for the rally to resume as the Fed and other major central banks wind back their tightening moves.
That’s the hope but failure to rally through the run up to Christmas and the New Year would be a bad sign and undermine market sentiment which has been wanting to rebound strongly now for two months.
Of course there are negatives – led by inflation remaining too high, China’s Covid case numbers continuing to grow and forcing the economy to slow dramatically and for labour markets to drop as jobless numbers start rising sharply.
We saw Friday a modest loosening of Chinese monetary policy with the People’s Bank of China announcing a 0.25% cut in the Reserve Requirement Ratio (RRR) – the proportion of money that lenders must hold as reserves. China last cut the RRR in April by the same amount.
Apart from Japan, that’s the most significant easing of monetary policy among developed economies for months and is an official acknowledgement the economy is weakening thanks to the impact of the third wave of Covid infections and the growing lockdowns and other control measures.
The central bank said on Friday that it would cut the RRR for financial institutions by 0.25% next Monday, which will release about 500 billion yuan ($US69.75 billion) in long-term funds.
The RRR cut will be on top of the tens of billions of dollars in bank loans and bond issues approved by the central bank for China’s embattled property companies – especially state-owned developers. More than $US80 billion in loans, bond issues and other financing moves were approved last week.
But this week also sees a speech by Fed chair Jay Powell that will have a big impact on the markets, especially as it will be this last before the important two-day Fed meeting in mid-December.
His words are likely to help market sentiment, giving the minutes of the last Fed meeting showed a changing attitude to the pace of rate rises.
Friday saw the Dow rise 152.97 points, or 0.45% to 34,347.03; the S&P 500 fell 0.03% to end the day at 4,026.12. The Nasdaq Composite slipped 0.52% to 11,226.36,
Shares of Apple fell 2% on news of reduced iPhone shipments from a Foxconn assembly plant in China as production was hit by worker unrest over the country’s strict health rules.
All three indexes ended the week higher and at five-month highs.
The Dow is up 1.78%, and the S&P 500 is up 1.53% during the short week. The tech-heavy Nasdaq is lagging the other two indexes but is still up 0.72%
The AMP’s chief economist, Shane Oliver said markets “resumed their rally last week helped by further signs of a slowing in rate hikes from the Fed and a decline in bond yields.”
“While the latter may partly reflect recession fears, lower bond yields also make shares more attractive from a valuation perspective.”
Besides the rise in the US market, Eurozone rose 1.2% and Japanese shares were up 1.4%, but Chinese shares fell 0.7% on Covid lockdown worries. Hong Kong’s Hang Seng Index fell more than 2.2%, even though the bailout of China’s struggling property sector accelerated.
The ASX 200 closed out the week with a fourth straight day of gains on Friday, adding 0.2% higher to 7,259.5 points with only two sectors, energy and mining, posting losses.
The Australian dollar surged against the US overnight and was trading at 67.51 US cents early Saturday morning, Sydney time.
The positive global lead saw Australian shares rise 1.5% to their highest since May and the market is now down by only 2.5% for the year to date.
Bond yields fell further. Oil and iron ore prices fell but copper prices were little changed.
