Please see below, the Daily Investment Bulletin from Brooks Macdonald. Received late this morning – 22/11/2022
What has happened
US equity markets fell yesterday as investors pondered what the Chinese authorities may do in response to the rising COVID cases in the country.
Energy
The oil price was hit yesterday by a confluence of factors: reduced expectations of Chinese demand, US recessionary fears and rumours that OPEC may increase supply. Both WTI and Brent measures moved more than 6% lower intraday yesterday as speculation of reduced demand and increased supply left few places to hide. Eventually Saudi sources issued a strong denial of the supply-side rumours which led WTI and Brent to end broadly flat on the day. This latest volatility within the oil market is another reminder of how easily the narrative can shift when markets lack direction.
China
Whilst it was only a week ago that investors were looking forward to an easing of Chinese COVID restrictions, sentiment has swung in the other direction given the pickup in COVID cases. The key question is whether the recent uptick in cases will be enough for the government to abandon their reopening ambitions in the medium term. In the short term we have seen Beijing increasing its restrictions with new arrivals required to take 3 PCR tests over 3 days and to stay at home until all results are negative. We have also seen some return to online learning rather than in-person schooling as officials respond. While the US CPI release has undoubtedly been the major driver of the optimism of the last two weeks, the release of a Chinese plan to reduce COVID restrictions was also a key driver. Reduced Chinese COVID restrictions mean not only that the outlook for the Chinese economy would improve but also that Chinese consumer demand would begin to support the global recovery.
What does Brooks Macdonald think
The Federal Reserve did not come to the rescue yesterday, with President Daly speaking about the economic risks of over-tightening but in the same speech warning that the US terminal rate may need to go above 5% to be sufficiently restrictive. President Mester put it in plainer language, saying that the Fed was not ‘anywhere near to stopping’ its interest rate hike process. Markets still expect the Fed to hike by 50bps rather than 75bps in the December meeting but the terminal rate for this cycle remains highly uncertain.
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Alex Kitteringham
22nd November 2022