The Cambridge Weekly – 26th June 2023

The Cambridge Weekly – 26th June 2023

Markets catching up with reality

Following three weeks of ‘not a lot of news’ being good news for stock markets, bad news dented investor sentiment last week. This has coincided with some reversal of global liquidity, as the US government is once again stepping up fundraising to replenish its coffers and Pan-European business sentiment surveys ticked down. No surprise then, that risk assets experienced a mild sell-off that reversed some of June’s gains. Hardest hit were China, Europe and the UK, but for inherently different reasons.

China suffered from a paucity of information. After having created much anticipation of policy action in early June, its central bank edged rates lower, while the government failed to announce any concrete support measures. China’s equity market therefore unwound some of its recent outperformance. We write about the recent disappointment in the second article.

Bank of England in a bind 

Last week’s UK inflation report was grim reading. May’s Consumer Price Index (CPI) level was 8.7% higher than a year ago, unchanged from April and the highest inflation reading of any G7 nation. It was yet another
reminder, if anyone needed one, that the UK economy’s problems need urgent attention.

Prices keep going up while growth prospects keep going down. At many points in the past few years, such stagflation prospects could be put down to extraordinary factors, like unprecedented global supply issues and the pandemic hangover. However, the impacts of those factors are diminishing. Global input prices are falling and – everywhere else – inflation is falling with it. Moreover, the 12-month rate comparison base is from a time (May 2022) when prices were already uncomfortably high. As explanations of the current inflations, external factors are not enough.

China’s re-opening disappoints 

The Chinese economy has disappointed this year. By now, that much is certain – after investors’ expectations of a post-Covid boom decisively fizzled out. China’s benchmark stock index, the CSI 300, climbed high through the start of 2023 after Beijing abandoned its strict zero-Covid lockdown policy in December and in January announced a raft of supportive economic policies. But growth has failed to match them over the last six months. The world’s second-largest economy recently recorded below-estimate figures for retail sales growth, industrial production and fixed asset investment, while youth unemployment rose to a record 20.8% in May. For investors, the prevailing opinion is that markets got ahead of themselves, with sentiment turning decisively since April. The CSI is now just flat (-0.2%) from the start of the year, while Hong Kong’s Hang Seng index has fallen 4.5% in that time.