In today’s briefing:
- Is QT Already Dead? Can The Fed Really ‘Ease’ Liquidity And Still ‘Tighten’?
- New Year, New Fears
- The Legacies of Repeated Stimulus: Entitled Investors Face Their Reality Check
- Three Questions Investors Need to Ask in 2023
- The Week That Was in ASEAN@Smartkarma – Minor Is Major, Krung Thai Card’s Creep, and Halcyon Agri
- January Market Thinking
Is QT Already Dead? Can The Fed Really ‘Ease’ Liquidity And Still ‘Tighten’?
- US QT will soon melt away into a ‘stealth QE’ under pressure from illiquidity in key financial markets. QT is effectively already dead
- Recent experiences by the UK (September) and Japanese (December) Monetary Authorities evidence poor sovereign debt market liquidity
- Lesson is that QE and QT are not symmetric policies: QE is easier to engage than to disengage via QT. This likely puts a floor under Global Liquidity in 2023
New Year, New Fears
- The U.S. stock market continues to face headwinds in the form of a deteriorating earnings outlook and a hawkish Fed.
- However, market internals are supportive of a short-term bounce before the downtrend resumes.
- Traders shouldn’t try to overstay their welcome. Investors should take advantage of any strength to lighten up equity positions.
The Legacies of Repeated Stimulus: Entitled Investors Face Their Reality Check
- In contrast to previous monetary stimulus since the global financial crisis, the velocity of circulation of money rose very early during the present expansion, thereby helping to produce inflationary pressures.
- Premature policy easing by the Fed remains the biggest market risk, particularly if China’s re-opening sparks resurgence in commodity price inflation that undermines US inflation returning to its 2% target.
- Fiscal and monetary stimulus in the US has created liquidity strains in the US Treasury market. Heavy borrowing by the Treasury in 2023 Q1 could complicate the Fed’s policy plans.
Three Questions Investors Need to Ask in 2023
- The equity outlooks for the three major regions are diverging. Europe stocks are the leadership, but investors need to recognize that the leadership is sensitive to weather and energy prices.
- China may be undergoing a re-opening rally, but a sustained advance is in doubt and a successful re-opening would have significant disruptive effects on commodities and the global inflation outlook.
- The U.S. stock market faces valuation headwinds, a deteriorating earnings outlook and a Federal Reserve that’s determined to suppress asset prices as a way to fight inflation.
The Week That Was in ASEAN@Smartkarma – Minor Is Major, Krung Thai Card’s Creep, and Halcyon Agri
- The Week That Was in ASEAN@Smartkarma is filled with an eclectic mix of differentiated, substantive, and actionable insights, macro and equity bottom-up, from across South East Asia.
- The first week of 2023 saw insights on Minor International, which continues to be a global Tourism recovery play, and Krungthai Card, as it sees credit costs creeping up.
- We also saw a macro piece looking at the stalling of the convergence of Malaysia’s per-capita income with developed economies and whether its decline can be thwarted.
January Market Thinking
- The consensus forecast for the Global Economy in 2023 is pretty clear, a peak in inflation and a sharp slowdown in GDP that will be ‘short but not painless’.
- The associated view for markets, however, is more diverse and largely depends on the extent to which this economic slowdown is regarded as being ‘already in the price’.
- Most analysis at least implicitly acknowledges that bear markets tend to have two phases; the first is the de-rating phase associated with higher interest rates and a tightening of monetary policy (arguably what we have just seen in 2022), while the second phase is the credit cycle, where the economic impacts of the tightening of policy feed through into lower earnings and thus a second round of weakness.
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