The Point

Tim Hext: Powell gives the green light after smaller rate rise

Last week US inflation rose at a slower-than-expected rate, leading to a surge in stocks.

Are sunnier days ahead? Or will this month’s data join earlier false dawns such as July?

“Although not entirely unexpected, lower inflation will continue to provide encouragement to markets that the Fed can slow the pace of hikes (likely 0.5 percentage points in December),” says our head of government bonds Tim Hext.

“Investors should view any decent rallies as an opportunity to de-risk portfolios for the challenges ahead.”

The super-high inflation battle of 2022 may be won. But the outcome of the war is still uncertain, says Tim.

Getting from 9% to 4% next year will be “the easy part”, he says. Commodity shocks from Russia and tight labour markets will likely see inflation get sticky around 4%.

“Unless we tip into a steep recession the US Fed will remain wary about calling victory on inflation soon.”

Crispin Murray: What’s driving Aussie equities this week

Emerging Markets: December quarter shows positive signs after a challenging 2022

IT was a difficult year for emerging equity markets in 2022, but the December quarter was more positive despite ongoing growth and inflation pressures in key economies.

Last year Russia’s invasion of Ukraine drove prices of key commodities sharply higher in an environment where inflation was already high and the outlook for interest rates was difficult.

This was combined with ongoing economic weakness in China.

The MSCI EM Index returned -20.1% in USD terms.

Here is a recap of the main EM themes in 2022 and what we learned in the closing months of the year.

How a weaker US dollar could benefit Emerging Markets investors in 2023

The direction of the US dollar — and the capital flows that result from that — are a key (possibly the key) driver for the emerging markest equities asset class.

The US dollar has been significantly weaker in recent months, suggesting a peak was reached in October 2022.

To be clear, there have been previous short-term peaks and troughs in the dollar during broad upswings and downswings. (For example in March 2020 during the initial onset of COVID-19, after which the dollar weakened but remained in its uptrend).

But if the dollar has topped out (at a level similar to the top in 2002) — and 2023 and beyond are to be weak-dollar years — investors should bear in mind the highly positive implications for EM equity and for the more capital-sensitive markets within that asset class.

This article explains the relationship between the US dollar and the EM asset class — and what it means for investors in the year ahead.

Why advanced economies such as South Korea are classed as emerging markets

SOUTH Korea is one of the few countries in the world to develop its own supersonic jet fighter.

It’s a stable and mature democracy — and home to some world-leading technology companies.

So some investors might be surprised to find it’s classed as an emerging market, along with Taiwan and  wealthy Gulf countries such as Saudi Arabia and the United Arab Emirates.

What is an emerging market? Who decides the definition of emerging equity markets?

It’s an enduring controversy. Some countries at the more advanced end of the emerging markets (EM) spectrum could arguably be classified as developed markets.

It’s useful for investors to understand how countries are classified as emerging markets as opposed to frontier (or pre-emerging markets) and developed markets.

Crispin Murray: What’s driving Aussie equities this week

A LOW point in the VIX volatility index last week proved to be the signal for a correction in the recent rally.

There was no specific macro news to prompt this. The weight of buying faded and the market shifted to a cautious position ahead of this week’s Fed meeting.

US ten-year government bond yields rose 9bps and the S&P 500 fell 3.4%. Brent crude oil fell 11.1% and is now down for the year to date, as the market worries about a downturn in demand.

China’s re-opening appears to be happening faster than expected.

The iron ore price rose 9.6% as a result, and is helping underpin the Australian equity market. 

The RBA hiked rates 25bps, as expected, and struck a more cautious tone on inflation.

We also saw the federal government launch a new energy policy which at first glance looks under-prepared. The policy introduces price controls that would likely make the power problem worse in the future.

There are six big macro issues going into next year:

1. The persistence of inflation — and how tight financial conditions will need to be in response

2. The scale of economic slowdown in the US and developed markets. (Real-time signals are benign, but the yield curve is a very negative signal)

3. The earnings leverage to that downturn — and whether nominal growth buffers earnings

4. Whether markets have already priced in economic downturn. The bear view is that markets bottom during recession, not before. Bulls point to a falling oil price, a weaker US dollar and lower bond yields as evidence of lessening headwinds for equities  

5. What China’s economy does as it exits zero covid

6. Whether the RBA can engineer a soft landing in Australia