Markets are booming, but they may have skipped the gun

Markets are booming, but they may have skipped the gun

Market reaction may have been overdone. US interest rates will remain high for some time to come as the Fed has committed to its target of 2% inflation and the likelihood of the US economy slipping into recession remains high as interest rate hikes (which will come with a significant lag) impact) continue to bite .

Still, the latest inflationary pressures were the first solid piece of positive news on this front and came amid an unlikely performance by the Democrats in the US midterm elections. They have retained control of the Senate, and while they are likely to cede the House of Representatives to the Republicans based on current voting trends, it will only do so by a very narrow margin.

Slight easing of COVID policy in China gives investors hope that the world’s second largest economy is poised to turn the tide.Recognition:PA

“Gridlock” – where one major party controls the White House and Senate and the other the House of Representatives – is seen as positive for financial markets because it almost guarantees there will be no major new policy surprises.

The good news on the inflation front was complemented by surprising news from China, where officials had consistently and vehemently denied speculation of an impending relaxation of Xi Jinping’s rigid and economically destructive zero-COVID policy.

While the changes announced on Friday are modest – a halving of quarantine times for those entering China, some reduction in testing requirements for travelers, reduced contact tracing within China and more limited lockdowns – they both show they recognize the importance of the nil -COVID’s approach has hurt the economy, how unpopular it is in China, and how unnecessarily crude it is.

While the changes are more fine-tuning than deregulation, and Chinese officials insist they will not relax the core of the policy, speculation lingers that there will be further and more substantive policy changes early next year, which have weighed heavily on China Business. GDP growth this year was targeted at 5.5 percent. It will likely collapse just over 3 percent.

Developments in China reinforced the feeling that last week marked turning points, albeit modest and timid, for the world’s two largest economies.

The other major drag on China’s economic performance this year has been the ongoing distress in housing markets, prompted by the introduction of debt limits for developers in 2020.

The policy unleashed a spate of developer defaults, a spate of uncompleted projects and protests from homebuyers burdened with mortgages on properties that may never have been completed or even built.

On Friday, the People’s Bank of China and China’s banking regulator announced a series of measures aimed at boosting demand for real estate and easing pressure on developers.

They eased some of the restrictions on developer borrowing, gave developers an additional six months to meet obligations to banks and bondholders that fall due within the next six months, and encouraged developers to close uncompleted projects and banks, to extend mortgage repayments by borrowers and provide financial support to stronger developers to absorb weaker competitors. The measures apply equally to private developers and their state counterparts.

A month ago, the Australian dollar was trading around 62 US cents.  It's now worth just under 67 US cents.

A month ago, the Australian dollar was trading around 62 US cents. It’s now worth just under 67 US cents.Recognition:Bloomberg

Officials are clearly trying to stabilize a housing market that has historically been a major driver of economic activity and, by providing support for more credit flowing into the sector, to slow and perhaps halt what has been a destructive spiral.

With developers facing hundreds of billions of dollars in principal and interest payments on their bonds over the next 12 months — Bloomberg’s estimate is just under $300 billion (US$448 billion) — $56 billion in new ones Bank financing (in addition to an earlier round). from $85 billion in September) may not be enough to reverse the decline but could help slow it.

Developments in China reinforced the feeling that last week marked turning points, albeit modest and timid, for the world’s two largest economies.

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Market reactions may have been overdone, but markets are forward-looking and while still fragile and vulnerable to shocks, the rise in equity markets and the significant drop in bond yields late last week signal that the US stock market is recovering after a very In a dismal year it’s still down 17 percent and bond investors are having their worst year in more than half a century – investors can see a glimmer of light on the horizon.

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