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China and US Rates Driving Markets, Time to Buy $SPY $QQQ

Asian markets mostly fell Friday on excess worries of another Federal Reserve interest rate hike and deepening concerns about China’s economy, with the country’s property crisis once again adding an extra layer of jeopardy.

Equity traders around the world have been spooked this month by a recent run of data suggesting that while US inflation is coming down, the economy remains robust and prices could remain sticky for some time.

That has led to a re-evaluation of the outlook for monetary policy, with optimism that July’s rate hike could be the last giving way to bets on one more before the end of the year.

That view has been given legs by some decision-makers at the central bank, who have suggested its two percent inflation goal can only be achieved and maintained by pushing borrowing costs higher. Inflation currently stands at 3.2 percent.

Expectations of another Fed hike have pushed 10-year Treasury yields — a gauge of future rates — close to their highest levels since the global financial crisis.

Data on Thursday did little to dissuade investors, with unemployment benefit applications falling the most since last month, indicating the labour market remains in rude health.

The Fed has said softening the jobs sector was key to bringing down inflation.

“This week’s data hasn’t given them any reason to let their guard down,” said Mike Loewengart of Morgan Stanley Global Investment Office.

“With housing starts, retail sales, and jobless claims all reinforcing the picture of a robust economy, another rate hike can’t be ruled out, even if the Fed remains on hold next month.”

Fed chief Jerome Powell’s speech at the annual Jackson Hole economic symposium in Wyoming will be closely followed for clues about the bank’s plans.

All three main indexes on Wall Street sank for a third straight session Thursday, while London, Paris and Frankfurt also suffered heavy losses.

Most major Asian markets were well in the red, including Hong Kong, which was down for a sixth consecutive day.

Investors are also keeping an anxious eye on China, where authorities are struggling to get a grip on the economy as its recovery from Covid peters out.

The country’s property crisis was also back in the headlines, with big-name and massively indebted firms in danger of going under.

On Thursday, Evergrande Group — considered the poster child of the drama — filed for bankruptcy protection in the United States, a measure that protects its US assets while it attempts to push through a restructuring.

That comes days after Country Garden said there were “major uncertainties in the redemption of corporate bonds”, suggesting it could default on a bond payment next month.

Meanwhile, there are now concerns about property firms that are backed by the government, with Bloomberg reporting that many are warning of widespread losses.

It said 18 of the 38 state-owned enterprise builders traded in Hong Kong and China posted preliminary losses in the first half of the year, compared with 11 that warned of full-year losses in 2022.

“China’s property slowdown is already hurting all developers, including the large government-linked ones,” said Zerlina Zeng, of CreditSights Singapore.

China’s economy is still strong, but it is facing some challenges. The economy grew by 4.8% in the second quarter of 2023, which is below the government’s target of 5.5%. However, it is still the fastest growing major economy in the world.

The main challenges facing the Chinese economy are:

  • The ongoing COVID-19 pandemic, which has led to lockdowns and disruptions to supply chains.
  • The US-China trade war, which has hurt Chinese exports.
  • The property market slowdown, which has led to a decline in investment.

Despite these challenges, the Chinese economy is still expected to grow by around 5% in 2023. The government is taking steps to address the challenges, such as easing monetary policy and providing financial support to businesses.

There are a few reasons to believe that the US market can rally despite inflation.

  • Strong corporate earnings: Corporate earnings have been strong in recent quarters, and they are expected to remain strong in the coming quarters. This is a positive sign for the stock market, as it suggests that businesses are doing well and are able to pass on higher costs to consumers.
  • Low interest rates: Interest rates are still relatively low, which makes it attractive for investors to put their money in stocks. This is because stocks offer the potential for higher returns than bonds or other fixed-income investments.
  • Valuations are not stretched: The stock market is not as overvalued as it was in the dot-com bubble or before the financial crisis. This means that there is still some room for stocks to rise, even if inflation remains high.
  • Economic growth:┬áThe US economy is still growing, albeit at a slower pace than in recent years. This growth is supporting corporate earnings and consumer spending, which are two of the main drivers of the stock market.

Shayne Heffernan

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S. Jack Heffernan Ph.D. Economist at Knightsbridge holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Crypto, Mining, Shipping, Technology and Financial Services.