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Market Insights – October 18, 2021

Each week, our Investment team shares its market views with you.

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Essentials

The Chinese economy continued to lose steam in Q3. GDP grew 4.9% year on year, in line with consensus forecasts. While industrial output and capex were weighed down by the property sector and power shortages in September, retail sales increased by more than expected.

Just 10% of S&P 500 companies have so far published their earnings, but the trend is looking good. US banks fared particularly well in Q3, buoyed by robust brokerage volumes and the release of provisions built up during the pandemic.

After consolidating for close to five months, the industrial metals index is heading upwards again and has reached a new record high. Prices have been driven up by supply shortages, but also by the rise in energy prices, which make up a large proportion of production costs.

Currencies – what impact will tighter monetary policies have ?

Since the pandemic began some 18 months ago, central banks in developed countries have stayed largely in sync with their monetary policies. Interest rates were quickly cut, at least by the central banks that still had some room to do so. The US Federal Reserve was one such bank, while in Europe and Japan interest rates were already at rock bottom or even in negative territory. Most central banks also found ways to urgently pump liquidity into the financial system. The number one priority was to support their governments’ stimulus measures by keeping interest rates as low as possible. But with the pandemic easing and the global economy proving resilient, these emergency policies are now coming to an end, and asset purchase programmes will be tapered. Some second-tier central banks have already started the process or are about to do so. Among the major central banks, the Fed is now poised to put the brakes on. It will probably start reining in its asset purchases towards the end of this year, and the first rate hike is likely to take place in late 2022. The European Central Bank and the Bank of Japan seem to be holding off for now – inflation there is currently less threatening than it is in the States. So not all central banks will change their monetary policies at the same time or in the same way, which should bring more volatility to the forex market and generate investment opportunities. Investors will once again be keeping a close eye on both inflation and interest rate spreads. The first countries to raise rates will almost certainly be the ones to see their currencies gain ground as well. In Europe, pound sterling is well positioned in this regard, as is the Norwegian krone, which is also being lifted by the continued rise in oil prices. While the US dollar should also be boosted by the Fed’s responsiveness, investors’ bullish stance on the greenback seems to be limiting its upside against the Swiss franc and the euro in the short term.

Japan – still catching up

Japanese stocks have been partly catching up with their peers in other developed countries since mid-August. This is primarily because of the uptick in the country’s vaccine rollout. Whereas Japan’s vaccination rate had been lagging far behind that of the rest of the developed world, it has since improved and in September even surpassed those of the US and Switzerland – two countries that had started their rollouts several months earlier.

Another reason for the rebound in Japanese stocks relates to Prime Minister Yoshihide Suga’s resignation in early September. The departure of this unpopular premier will put Fumio Kishida, the Liberal Democratic Party’s new leader, in better standing for the legislative elections in late October. The Japanese stock market generally tends to do well in the run-up to elections for the lower house. A strong correlation has been demonstrated between the Topix and the number of seats taken by the winning party. This good news on the political front comes hand in hand with the prospect of an uptick in economic growth. Earnings forecasts have also been revised sharply upwards for Q4 and for 2021 as a whole. Japanese stocks are reasonably priced. Progress on the vaccination front means the country’s borders could be reopened in the coming months, and a slate of stimulus measures should be introduced after the elections. In short, the stars are well aligned for Japanese stocks to keep doing well.

 

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