Market Overview

The US equity markets have faced another challenging week as markets reacted to the Federal Reserve meeting where a hike of 75 bps in interest rate brought the federal funds rate to 3.75%-4.0%. US Fed chair Powell has hinted at a slowdown in the pace of tightening, but that the current terminal rate of 4.6% in the Fed’s ‘dot plot’ projections need to be revised higher and the hiking may be longer as well.

While the Fed continues to fight inflation with headline inflation 8.2% and core inflation still 6.6%, the outlook for US growth in the coming quarters is not positive. Earnings expectations are too optimistic, and earnings and sales numbers will be challenged in the next quarter. As the world recovers from the pandemic and bottlenecks in the supply chain get relaxed, we can expect producer price indices to fall and bring inflation rates closer to their long-term trend at some stage.   

In the US, mid-term elections are scheduled for this week, with the likely outcome for the Republicans to take control of the lower House, implying a “split government” which could lead to a policy gridlock at a time when the risk of recession still looms higher. MSCI China rebounded last week on news that China’s ‘zero-covid’ policy would be relaxed. However, the State Council then released a statement that zero-covid is here to stay. As Xi Jinping consolidates power, his refusal to drop the zero-covid policy remains a contention point. Household spending in China remains subdued and the property sector is still stressed.

Commodities, FX and Bonds

The BoE has increased its policy rate by 75 bps to 3.0% and headline inflation in Euro area reached an annual 10.70% in October. ECB Bank President Christine Lagarde has commented that a recession alone may not be enough to tame inflation, signaling further rate hikes ahead. Given this, it would be prudent to stay away from the more vulnerable euro area countries.

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