Weekly Buzz: Central banks tighten the belt, zero-Covid China, and the US midterm elections

🏦 Central banks continue to tighten the belt 

Inflation remains red-hot, and central banks have been ramping up their rate hikes to combat it. In the US, the Fed hiked rates by 75 basis points (bps) last Wednesday for the fourth time in a row. And though the economy is cooling, it’s not cooling fast enough: The US jobs report for October shows that unemployment is rising, but not fast enough to cool down wage growth. US inflation, meanwhile, slowed more than expected last month, but is still a ways away from the Fed’s 2% target.

The Bank of England also hiked rates by 75 bps in the biggest move in more than 30 years. Australia, Canada, and Norway raised rates too, but at a slower pace than before – signalling a more dovish approach (more on that later).

Why does this matter? 

• A low unemployment rate contributes to wage growth, and in turn, to higher prices (and therefore inflation). And since the jobless rate is still lower than the Fed would like, we’ll likely see continued rate hikes to bring it up to what economists call the “natural rate”.
• If you’re paying off any debts with variable interest rates – like a mortgage – it could get more expensive.
• In addition, the high uncertainty over how much monetary tightening will be needed to bring down inflation is contributing to higher volatility in the markets.
• If you’re a long-term investor (think: 3–5+ years), you’ll probably ride through this volatility. Just make sure you stick to your risk preference, have enough cash to tide you through any short-term hurdles, and that any other spare cash is benefiting from a rising interest rate environment.

Find out what else you need to know about investing in a bear market.

🇨🇳 The $18 trillion question: When will China rebound? 

Last week, China stocks soared at the fastest pace worldwide, as financial markets – hungry for any hint of good news – anticipated the worst was over. Unverified talks of China easing its harsh zero-Covid policy led the Hang Seng China Enterprises Index to experience its best weekly gain since 2015.

But its reopening plans are far from certain. Over the weekend, China’s health officials said the country will “unswervingly” stick to Covid measures. That led to the offshore yuan giving up some of its gains and the rally in the Hang Seng losing some steam.

Our big takeaway?

China’s zero-Covid policy might be the biggest drag on the $18 trillion economy. That means a full reopening would be a boon for growth, as well as Chinese assets.

That’s why if you throw the markets a bone, they’ll react. With the Hang Seng Index hitting its lowest level since the depths of the Global Financial Crisis, some investors have scooped up China stocks as they bet that things can’t get much worse. But until the government lays out a clear path, rumours may continue to take markets on a roller coaster ride.

👀 What we’re watching

US midterm elections

On Tuesday, Americans cast their ballots in the US midterm elections. This happens halfway through the sitting President’s term and plays a crucial role in defining the country’s politics over the next few years. The votes are still being counted, but early signs suggest the Republican party may have gained a majority in the House of Representatives, which would result in a divided government.

Markets tend to favour political gridlock because it means more certainty, and historically, equities have tended to rally after midterm elections with this result. But that might not be the case this time around. For one, the Fed isn’t yet done hiking rates and is expected to tip the economy into recession as it continues its battle against inflation – typically not a great time for stocks.

COP27

COP27 kicked off this week in Egypt, where 120 world leaders are gathering to discuss the actions they’ll take to tackle climate change. Last year’s event promised to “phase down” the use of coal, stop deforestation by 2030, and cut methane emissions by 30% by 2030. Events like these are usually a slow burn for the climate agenda, but ultimately push forward progress in ESG and Climate Tech. (Side note: These also happen to be portfolios you can invest in with us).

We’re not the only ones keeping a critical eye on the event…

🎓Jargon buster: “Hawkish” & “Dovish”

What does the media mean when it says central banks are “hawkish” or “dovish”?

🦅Hawkish policies  aim to tighten the monetary environment, and can include measures such as raising interest rates and reducing balance sheets –  even at the expense of economic growth and employment. When it goes too far though, it can push economies into recession.

🕊️Dovish policies, on the other hand,tend to support low-interest rates and loose monetary policies to maintain low unemployment, and can result in higher inflation. Pushed too far though, it can overheat the economy and lead to runaway inflation.

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