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Client Update - 24th February 2023

The topsy turvy nature of investment markets have struck again. Last month, the American S&P 500 jumped 7 per cent, supposedly because investors started to think (or hope) that lower inflation rates would slow Federal Reserve (Fed) rate rises. On Tuesday, however, US equity markets suffered their biggest fall for two months, as strong economic data sparked market chatter about the prospect of more tightening from the Fed. That dragged other indices down and intensified arguments between those observers (such as Morgan Stanley’s research team) who view January’s market euphoria as overdone and those (such as Jim Cramer, the celebrity host of Mad Money) who think it is the market bears who are “in denial”.

This debate will undoubtedly run and run, particularly since the latest Fed minutes suggest that even US central bankers were not entirely unified about the outlook. We often get client feedback about why we write so much about the US rate policy and US markets. The phrase “When America sneezes, the world catches a cold” originally came from France in the Napoleonic era I believe. To be clear, the phrase then was “When France sneezes” – but it has now been widely adopted in global economics to underline Americas wide impact on the global economy. Perhaps one day we will be writing the same about China. For now, however, while investors obsessively wait for the next batch of economic data or the latest words of Fed chair Jerome Powell, they do need to cast their gaze wider as well — towards what is happening with big central banks outside American shores.

For over a year now, the Bank of England and the US Fed have tried to combat inflation by raising rates and moving from quantitative easing to quantitative tightening. Economic logic might suggest that this tightening should have created tighter financial conditions globally. But this is not yet the case everywhere. An unexpected wrinkle of recent months, which has complicated the Fed’s policy challenge, is that the Chicago Fed’s national financial conditions index has dropped to minus 0.45, compared to minus 0.13 last September. (A more negative number represents greater loosening.) Why? One reason might be investor optimism about growth. However, Citi’s Global Markets Strategists suggest it is non-US central bank flows. For even as the Fed’s balance sheet has been shrinking, the People’s Bank of China has been pumping more liquidity into the system and the Bank of Japan has maintained its so-called yield curve control policies.

Meanwhile, the European Central Bank (ECB) has accidentally contributed. Like the Fed, the ECB has been raising rates, with more to follow. But its balance sheet has marginally increased, due to some shifts in government deposits. The net result, Citi calculates, is that these three central banks have collectively pushed almost $1tn of additional liquidity into the global system since October (when adjusted for exchange rates). This more than offsets what the Fed has done. Call it, if you like, some accidental anti-quantitative tightening. The availability of liquidity and the challenge to work out where central bank policy will go next, remains key.

I mentioned China briefly and it was interesting to read this week that wealthy passengers in China are having to book private jets far in advance on sought-after routes as companies struggle to meet surging demand after the country’s exit from zero-Covid. Beijing’s decision late last year to scrap mandatory quarantine for inbound arrivals and reopen its borders, pivoting away from previous tight curbs on travel, has sparked a scramble to charter aircraft, in an echo of the clamour for private flights seen in other markets as the pandemic receded.

The number of domestic and international flights made on private jets from mainland China was 32 per cent higher in January compared with last year and 10 per cent higher than pre-pandemic levels in 2019, according to aviation data firm WingX. Demand for private jets has also been driven by the slow reopening of international commercial services between China and the rest of the world, while some of the country’s wealthy sold their private aircraft during the pandemic. Investment themes that have been playing off China’s reopening have done well so far, such as global luxury brands, and for now an increased in demand from the wealthier Chinese population has been a welcome boost to the global economy. There don’t seem to be any sniffles on the horizon there, for the time being anyway.

Do have a good weekend.

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