06.12.2023 – 06:57

Colivar Weekly Market Pulse

Here you will read the Colivar Weekly Market Pulse,courtesy of our guest author Mahnoosh Mirghaemi.

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Enjoy our weekly insights about markets, macro-economics, geopolitics and investing

2023 November to Remember and China’s Economic Impact

The global stock market has staged a remarkable comeback in 2023, posting a gain of almost 20% after a challenging 2022, a testament to its resilience and the shifting economic landscape. This resurgence was particularly pronounced in November, marking a significant turnaround from earlier trends. However, this period of growth encountered a unique challenge as stocks with substantial exposure to China diverged from the general market trend, underperforming notably. This divergence reflects a growing scepticism among investors regarding the prospects of China’s economic recovery amidst ongoing challenges. While the S&P 500 and other markets worldwide celebrated a robust rally, closing November with impressive gains and marking its first monthly increase since July, the tepid response to Chinese market exposure painted a more complex picture of global economic interactions and investor sentiment.

Key Drivers of November’s Rally

Inflation Trends: A significant contributor to the November rally was the continued downward trajectory of inflation. This trend helped alleviate persistent concerns about escalating price increases, a major worry for investors and policymakers alike. The easing of inflationary pressures played a key role in restoring market confidence and buoying stock prices.

The Federal Reserve’s Policy Stance: Another critical factor was the Federal Reserve’s indication of a potential pause in its aggressive monetary tightening policy. This signal was perceived positively by the market, as it suggested a more accommodating stance that could support economic growth and market stability. The Fed’s pivot from its previously hawkish stance significantly boosted investor sentiment and market performance.

Economic Resilience: Despite the challenges posed by high interest rates and global uncertainties, the economy demonstrated remarkable resilience. This unexpected strength in economic performance, evident in various sectors, helped dispel some of the doom and gloom that had clouded market outlooks. The ability of the economy to withstand these pressures and maintain growth was a key driver of the stock market’s positive momentum.

Corporate Earnings: Adding to the positive market sentiment were corporate earnings reports that came in better than expected. These reports were a testament to the underlying strength of businesses and their ability to navigate a complex economic landscape. The positive earnings surprises provided a further boost to the market, reinforcing the belief in the robustness of corporate America.

European Stock Performance and Chinese Economic Influence

In November, the interconnectedness between the European stock market's performance and China’s economic health was starkly evident. European stocks with high dependency on the Chinese market struggled, i.e., luxury, unable to partake in the global rally due to China’s ongoing economic difficulties. Despite stimulus efforts by the Chinese government, investor scepticism remained high, particularly towards assets with significant exposure to China, as highlighted by strategists from institutions like Barclays.

An exception to this declining trend has been the European mining sector, where companies such as Rio Tinto derive significant revenue from China. However, the broader European market, especially sectors like basic resources, faced challenges mirroring China’s economic struggles. This was reflected in their underperformance compared to broader market indices.

In contrast, the German DAX index showed resilience, posting gains and nearing its July high, thanks to strong cyclical stock performance and positive earnings reports. However, the potential for sustained growth in the German market is tempered by its vulnerability to the Chinese economic landscape and broader global economic challenges.

Interest rate and bond market dynamics

In November, the bond market experienced significant movements, largely influenced by a downward trend in interest rates. This decline in rates, contributing to the overall market rally, positively impacted investor sentiment and market dynamics. In particular, investment-grade bonds posted exceptional returns, in stark contrast to their performance in September, indicating a shift in the bond market landscape. The key factor in this improvement was the easing of interest rate pressures, which generally benefit bond investments.

Final Thought

In the stock market, leadership was evident in cyclical sectors and those sensitive to interest rate changes, including small-cap stocks, financial services, consumer discretionary, technology, and real estate. These sectors leveraged the favourable economic outlook and reduced interest rate pressures, showcasing resilience and adaptability.

Looking ahead, the S&P 500 is poised to reach new highs, although potential challenges like shifting Federal Reserve policies, possible economic slowdowns, and geopolitical uncertainties could cause market fluctuations. Despite these challenges, the market shows potential for continued strong performance, as seen in post-recovery phases since 1980. Inflation trends also play a crucial role, with a continuing downward trajectory signalling economic stability. The Federal Reserve’s decision to hold rates steady in November significantly bolstered the market’s gains. The Fed’s future decisions will be critical in shaping both bond and stock market dynamics.

Lastly, the labour market remains a strong pillar of the economy. Despite some signs of softening, its resilience is expected to buffer against significant downturns, supporting broader economic stability and continued market growth.

Next week in the U.S., anticipated November unemployment data may indicate a softening labour market, potentially triggering recession indicators. China is expected to see a slight improvement in exports and imports, mainly due to a low comparable base at the end of 2022. The central banks of Australia, India, and Poland are expected to maintain their current rates. Economic projections suggest lower GDP readings for Australia and South Africa, with Brazil’s economy likely contracting in the third quarter. Further, critical inflation reports are due from several countries, including Russia, Turkey, Mexico, Chile, Colombia, and South Korea, providing further insight into the global economic climate.

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