Weekly View - The people’s leader
The Chinese Communist Party congress saw Xi Jinping appointed as China’s unrivalled leader, surrounded by a politburo comprising staunch loyalists. Xi’s speech to the congress clearly laid out his concerns, with security mentioned 91 times compared with 60 references to the economy (including significant nods to wealth redistribution). We expect a conservative, inward-looking mentality to dominate in Chinese policy making in the years ahead, with continued tensions over Taiwan and intense rivalry with the US over semiconductors.
The new UK prime minister will likely be Rishi Sunak following the withdrawal of Boris Johnson from the race. While Chancellor of Exchequer Jeremy Hunt is shortly expected to deliver a tough new budget, we are underweight UK gilts and sterling. The Bank of England has indicated it will resume plans for with some asset sales now that it has stabilised the gilt market. Yet we see the events in the UK as highlighting the challenges facing monetary authorities everywhere as they try to implement quantitative tightening in the face of diminishing fixed-income liquidity. The US Treasury and the Federal Reserve recently met the main market participants to stave off a freeze in the market for US Treasuries (there is a suggestion the US government could step in to buy less-liquid Treasuries, if needed). In Germany, chemical and healthcare sector trade unions have agreed a wage deal set at 3.25% for two years—hopefully presaging similarly modest settlements in other sectors, which would be positive for inflation. In Italy, the appointment as finance minister of Giancarlo Giorgetti, who served in Mario Draghi’s government, should reassure markets. The European Central Bank (ECB) is widely expected to hike its deposit rate by 75bp this week, but the real focus will be on the terminal rate, liquidity conditions and quantitative tightening. The head of the French central bank, François Villeroy de Galhau, said the ECB needs to continue increasing rates to get to the ‘neutral rate’ by the end of 2022 which he considers to be “below or close to 2%”. Elsewhere, the yen fell below the 150 level for the first time since 1990, prompting further yen buying by the authorities (with possibly more to come). The Tokyo swap rate is 56bps, 31 bps above the 10-year yield, building pressure on the yield curve. We are positive the yen.
Q3 results so far represent the weakest start to a reporting season since the pandemic. Earnings growth (ex energy) on the S&P 500 stands at just 1.4% year on year, close to what would be considered an earnings recession. We are positive hedge funds, with grocery chain Kroger’s purchase of rival Albertsons positive for event-driven strategies.