The Cambridge Weekly –29th January 2024

The Cambridge Weekly – 29th January 2024

Positive growth sentiment returns

After the bumpy ‘hangover’ start and the volatile two weeks that followed, it looks like investors are finding their feet again, slowly turning January into a far more positive month than many had expected, following the very strong rally into the year-end. As the month draws to a close, financial markets are turning out to be rather quiet, at least in terms of price volatility. Reasonable sums of savings are flowing into financial assets. Companies and governments are able to find willing investors to fund their requests for capital. Therefore, almost entirely across the board, regional equity markets are up another healthy amount. Even China has managed another positive week, with Hong Kong finally bouncing (we look at how sustainable
that bounce may be in a separate article). Surplus liquidity searching for attractive returns, is the one market variable that has repeatedly surprised during this highly unusual post-pandemic cycle, and 2024 does not seem to be any different.

Will Xi allow China to profit?

Some relief finally for Chinese traders last week. 2023’s prolonged decline in Chinese stocks had continued through January, turning into a sharp sell-off the previous week. But last week, Hong Kong’s Hang Seng index rose more than 6% during midweek trading, after signs that the Chinese government would step in to stop the rout. Last Tuesday, Premier Li Qiang called for “more forceful and effective measures to stabilise the market and boost confidence”. This lifted Hong Kong-listed equities but left domestic shares only slightly up, with investors aware Beijing’s rhetoric can often be just that. It was followed on Wednesday, though, by the People’s Bank of China (PBoC) cutting bank reserve requirements, and thereby unleashing a trillion
Yuan of lending headroom into the banking system. Both the Hang Seng and the CSI 300 – mainland China’s benchmark stock index – rallied in response.

Commodities and growth

Deficit increases are more apparent in the US than anywhere else. This is partly just because the US is the largest economy in the world, and the US Treasury is the biggest national borrower – so people notice when it asks for more. But the trend toward fiscal expansion over the last decade is undeniable, and exceeds the growth in the US economy. This became very apparent during Donald Trump’s presidency, when dramatic tax cuts drained the Treasury’s coffers.

The Republican Party has a reputation for favouring fiscal conservatism – most famously with the ‘Tea Party’ movement that opposed basically all spending during the Obama administration. Trump captured the hearts of many former Tea Partygoers, but simultaneously abandoned any pretence toward deficit reduction. Coming late in America’s then growth cycle, Trump’s tax cuts meant the US entered the pandemic with already stretched debt metrics.