César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
Games over
Market movements last week were dominated by geopolitics, with a risk on/off mood determined by news around Ukraine. Markets hoped that Russia was indeed retreating as claimed, allowing for one day of positive mood. This was reversed the next day as it became clear that Russian troops not only remained in position but were also testing missiles. Equities came down as a result, while ‘safe assets’ typically associated with less risk gained. Gold reached a 12-month high and 10-year US Treasury yields retreated. Part of the yield curve remains inverted.
Markets are still undecided as to what the March Federal Reserve meeting will bring. Few Fed officials gave speeches last week, making it difficult to establish overall sentiment among policy makers. For now, there seem to be as many hawks as doves, with the last Fed meeting minutes showing that voting members remain very split, both on the speed of interest rate rises and the reduction of the Fed’s balance sheet. US producer prices rose 1% in January, boding ill for the inflation outlook. While January US retail sales figures beat expectations, growth has stalled in real (inflation-adjusted) terms. We will be monitoring the risk of over-tightening by the Fed, which could lead to a marked economic slowdown and wider credit spreads, especially in the high-yield space.
In another regulatory blow to the Chinese consumer tech industry, Chinese authorities asked food delivery companies to reduce the margins they charge restaurants. Shares in a key Chinese food delivery company were down by 15% on the news. Amidst regulatory fluidity, determining large Chinese tech companies’ profitability remains extremely challenging. Past valuation metrics no longer apply and caution is warranted until the Chinese regulatory environment stabilises. Meanwhile, some local Chinese governments have lowered the down-payment requirement for property acquisition in a bid to stabilise the sector. For now, Chinese property sales still seem to be declining, putting further liquidity stress on companies. Last week, yet another developer considered a ‘safe’ investment ran into trouble, further calling into question the health of the Chinese real estate market. As the winter Olympics draw to a close, China faces a pick-up in covid cases, as it perseveres with its zero covid policy. Difficulties around Hong Kong’s covid situation remain, with mass testing underway and the territory preparing to free 10,000 rooms from large property owners to isolate positive cases. If it comes to it, we might see the Chinese central bank move to stabilise growth.
