A Red Sweep
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Here are some of the biggest stories from last week:
Dig deeper into these stories in this week’s review.
After a stronger-than-expected start to 2023, buoyed by lower energy prices and China’s reopening, global growth is expected to slow down as rate hikes weigh on economic activity and China’s rebound disappoints. That’s according to the OECD, which upgraded its growth forecast for the world economy this year but lowered its outlook for 2024. Global growth will ease to 2.7% in 2024 after an already “sub-par” expansion of 3% this year, according to the latest OECD forecasts out last week. With the exception of 2020, when the pandemic struck, that would mark the weakest annual expansion since the global financial crisis. What’s more, the organization warned that risks to its forecast are tilted to the downside due to potential stronger effects from past rate hikes, persistent inflation, and China’s ongoing challenges.
Delving into the regional and country outlooks, the OECD reduced its growth forecasts for the euro area for both this year and next. That's largely due to Germany, which is anticipated to experience a 0.2% contraction in its economy this year, placing it alongside Argentina as the only G20 nations expected to face downturns. China's downgrades were also particularly bad, with growth next year falling further below the government’s official target of “about 5%” due to weak domestic demand and lingering problems in the property sector. That’s not good news for the world economy, with the OECD warning of significant global repercussions should China's slowdown accelerate further.
Over in the UK, the country’s inflation rate unexpectedly fell in August to the lowest level in 18 months. Consumer prices in Britain rose by 6.7% in August from a year ago, contrary to economists' expectations, who had forecasted inflation to rise from 6.8% in July to 7% last month. Adding to the good news, core inflation, which excludes food, energy, alcohol, and tobacco prices, fell sharply to 6.2% in August from 6.9% the month before (economists had expected no change in the figure). Services inflation also eased to 6.8% from 7.4%, potentially alleviating the upward wage pressure that has particularly worried the Bank of England.
The report came as a massive relief for the UK, which for months has had the worst inflation problem out of the G7 countries. But some economists cautioned that it’s too early to celebrate. After all, Britain’s inflation rate is still more than three times higher than the BoE’s 2% target. What’s more, with oil prices surging in September, the decline in headline inflation could decelerate or even reverse.
Still, the bigger-than-expected drop gave the nation’s central bank the confidence to keep interest rates steady last week. The BoE held its key rate at 5.25%, marking the first pause after 14 consecutive rate hikes since December 2021, when rates stood at just 0.1%. But the decision was far from a unanimous one, with five officials voting to leave rates unchanged and four wanting to raise them to 5.5%. In any case, the BoE made it very clear that this was just a pause, and that it would respond with more rate hikes if inflation doesn’t fall as expected.
Across the pond, the Fed also left interest rates unchanged last week, but it signaled that borrowing costs will likely stay higher for longer after one more rate hike this year. The US central bank left its target range for the federal funds rate unchanged at a 22-year high of 5.25-5.5%, while its latest "dot plot" showed that 12 out of 19 officials supported an additional rate hike in 2023 to rein in inflation once and for all. The plot also revealed that most officials see a much slower path of rate cuts in 2024 and 2025. They now anticipate the federal funds rate to drop to 5.1% by the end of 2024, up from 4.6% when projections were last updated in June. They expect further declines to 3.9% and 2.9% by the end of 2025 and 2026 respectively.
Fed officials also released a new set of economic projections forecasting stronger growth and a more benign inflation outlook this year compared with previous estimates released in June. They reduced their core inflation forecast for 2023 to 3.7%, down from the previously predicted 3.9%. For 2024, they maintained their forecasts at 2.6%, while projecting that inflation would only return to the Fed’s 2% target by 2026. Officials' economic growth estimate for this year rose sharply to 2.1% from 1%, and was further adjusted up by 0.4 percentage points for 2024 to 1.5%. In other words, a "soft landing" for the US economy, which seemed elusive just three months ago, now appears attainable – surely a cause for celebration for investors.
Finally, in a move widely expected by economists, the Bank of Japan kept its monetary policy unchanged last Friday, maintaining its short-term interest rate at minus 0.1% and making no adjustments to its yield curve control program. The latter allows the yield on 10-year Japanese government bonds to move within a tight band of plus or minus one percentage point around a target of 0%. The BoJ’s stance comes despite the fact that inflation has exceeded its 2% target for 17 straight months, prompting some economists to believe that the central bank will have to eventually abandon its ultra-loose monetary policies.
Emerging market small-cap stocks have been trouncing their large-cap counterparts since the end of the Covid-induced market selloff in 2020. So far this year, the MSCI EM Small Cap Index has registered a gain of approximately 12 percentage points higher than the large-cap index, setting it on track for its second-best relative return advantage in 14 years.
Several factors are contributing to this trend. First, the small-cap index has a notably lower weight in China at 7.4%, compared to the large-cap index, which attributes its largest weight to the country at 29.5%. This lower exposure has helped the small-cap index since 2020 given that China implemented some of the strictest pandemic restrictions and kept them in place for the longest, adversely affecting its economic activity and stock market. And even though the country abandoned these restrictions about 10 months ago, its subsequent economic recovery has been very underwhelming.
Second, China's economic struggles have a more pronounced effect on non-Chinese stocks in the large-cap EM index than on those in the small-cap index. This is primarily because larger companies often have supply chains, investments, and operations in China, making them more susceptible to the nation’s economic shifts. Smaller firms, in contrast, are typically more influenced by their local economies than by international factors. What’s more, the small-cap EM index's biggest country weight is India (at 25.7%), which has been a notable growth success story recently, positively impacting the small-cap firms operating within its borders.
Last but not least, EM small caps have been benefiting from the investing craze in young AI and EV companies. For example, the tech-centric markets of Taiwan and South Korea, the second- and third-biggest country weights in the small-cap index at 21.3% and 14.4% respectively, are seeing their semiconductor companies benefit from the booming demand for all things AI.
General Disclaimer
The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.
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A Red Sweep
Spooky Sell Signal
Gold Shines at New Highs
The ECB Cuts Again
Slowing Disinflation
Golden-Week Rush
China’s Massive Package
The Fed’s Big Rate Cut
The ECB Cuts Again
Banks Turn Bearish On China
Million-Dollar Gold Bar
Bonds Are Back
Black Monday
Diverging Rate Decisions
Still Strong
Smaller Is Better
The Name Is Bond, Green Bond
Landslide Victory
AI-Frenzy Takes a Break
Bye Apple, Hello Nvidia
The Fed Stays Put
An Indian Rollercoaster
The Name’s Bond, Convertible Bond
Nvidia Does It Again
A Small Relief
From Boom To Bust
Higher For Longer
Still Magnificent
Halve And Havoc
Stubborn Inflation
Choc Shock
An End Of An Era
Britain Bounces Back
China's Goal
Bye iCar, Hello iAI
Nvidia Beats Expectations
Germany Overtakes Japan
Riding The Dragon
China’s Falling Behind
India Outshines Hong Kong
Aging Dragon
US Inflation’s Accelerating
Tesla Lost Its Crown
2023 Market Wrap-Up
The Last Samurai
Fed Teases 2024 Rate Cuts
Bond Market's License to Thrill
Cyber Week Bonanza
OpenAI's Leadership Shuffle Drama
Inflation’s Cooling In The US And UK
Back Into Deflation
Triple Hold On Rate Hikes
The US Economy Is Still Flexing Its Muscles
Inflation’s Refusing To Come Down
Investors Are Bracing For A Dip
An End In Sight
End Of An Era
China's #1 Ambitions Are Fading
Americans’ Piggy Banks Are Running Low
Trying To Break The (Wage-Price) Spiral
China: A Nation In Deflation
Uncle Sam Gets Downgraded
Twin Hikes
Stagnating Dragon
A Tale Of Three Inflation Stories
Silver Is Shining Bright
UK Inflation: Defying Gravity
The Fed Calls A Timeout
A One-Two Punch
Shrinking Dragon
Keep Calm And Carry On
The AI-ffect Of The AI Mania
SLOOS: Crunch Time Looms
Last Republic
LVMH Pops The Bubbly
India Takes The Population Throne
The End Is Nigh
OPEC Drops the Pump
Why Gold Is Glittering
Can't Stop Won't Stop
To Hike Or Not To Hike
China’s An Underachiever
Cash Is King
What Energy Crisis?
The Name’s Bond, Japanese Bond
The AI War Has Begun
Hikes Everywhere
What Recession?
Shrinking Population
Grab Your Box And Leave
A Gloomy Prediction
It's Darkest Before The Dawn
Elon Fires Himself…
Triple Whammy
No More Zero-Covid?
Eight Billion And Counting
Another One Bites The Dust
No Santa Pause
Big Tech, Big Disappointment