MARKETS LOOKING FOR THE POSITIVE AS CHINA HINTS AT EASING COVID RESTRICTIONS

MARKETS LOOKING FOR THE POSITIVE AS CHINA HINTS AT EASING COVID RESTRICTIONS

This week the markets have been second-guessing central banks – a favourite pastime but often a costly one. Equities and bonds have risen off the back of some pretty conventional comments by central bankers, as for some reason markets have decided this time they mean something slightly different. Given banks are committed to keeping rates high until inflation is low, analysing speeches for clues to what central banks might do seems fairly redundant when inflation is 10%.

Elsewhere protests in China over the incredibly strict zero-Covid policy might be starting to make a difference. Officials were quoted as saying the fight against the virus has entered a new stage – largely interpreted to mean a hopeless one – as China contends with the latest Omicron variant that is causing cases to increase dramatically despite its harsh lockdowns. If suppressing the spread is impossible and the seriousness of infection diminished, it is hoped that China will belatedly begin living with Covid and start to reopen. This will be a welcome boost to the global economy.

Financial markets were boosted by the chair of the US Federal Reserve signalling a slowdown in the pace of its interest rate hikes. US treasuries rose and equities rallied sharply after Jerome Powell said the bank is likely to moderate its rate increases as it waits to see the cumulative impact of this year’s rate hikes at the meeting later this month. US equities saw some of the biggest gains as the tech-heavy Nasdaq index increased by 4.5% on Wednesday and Asian and European equities followed.

Despite market moves, the overall tone of Powell’s speech was not that positive. He stressed that individual increases are less important than how high they may have to go and how long rate will stay there, saying “It is likely that restoring price stability will require holding policy at a restrictive level for some time”. This echoes recent comments from the European Central Bank. Data this week showed inflation slowing for the first time in 17 months but ECB president Christine Lagarde said the bank is not done with raising interest rates.

CHINA: ANTI-COVID PROTESTS RAISE HOPES THAT RESTRICTIONS MAY EASE

Protests against China’s strict anti-Covid restrictions have sparked volatility in Chinese equities. After two years of the government’s severe zero-Covid policy protests have rapidly spread across the country after rising infections caused some local authorities reimpose the country’s harsh restrictions. Chinese equities fell at the start of the week before rallying strongly as the government showed the first signs of loosening restrictions. Senior officials said the country can move to a new phase of the fight against the coronavirus due to better vaccination rates and a weaker strain of the virus.

China’s zero-Covid policy is one of the reasons that Chinese equities have lagged emerging markets for much of the year as lockdowns have hampered manufacturing output. The latest Caixin General Manufacturing Purchasing Managers’ Index shows output contracted for the fourth month in a row. China also faces headwinds from its property sector as developers struggle with vast debts and buyer confidence remains elusive.

EQUITIES: UTILITIES FACE GREATER REGULATORY INTERVENTION

Utility stocks tend to perform well during times of economic uncertainty due to their consistent earnings and stable valuations. Utilities have performed well during 2022 and energy companies have produced particularly strong returns as sky high oil and gas prices have generated record profits. Last month’s autumn statement included plans for a new 45% windfall tax on electricity generators which will reduce profits from January, but this has not dampened share prices of energy generators and suppliers.

Although revenues are rising, utilities are facing more regulatory pressure. Energy regulator Ofgem this week called for energy companies to commit to a five-year investment plan without further increases to customers bills. Meanwhile water regulator Ofwat has ordered 11 water companies to reduce customer bills due to problems with pollution and flooding. Ofwat and the Environment Agency both have open investigations and could hit water companies with further fines and water companies have lagged other utilities this year.