MoneyFitt

08 December 2022

Happy Thursday🎄

US large-cap S&P 500 closed 0.19% DOWN 🔻 Tech-heavy Nasdaq Composite closed 0.51% DOWN 🔻 Pan European STOXX Europe 600 closed 0.47% DOWN 🔻 HK’s Hang Seng Index closed 3.22% DOWN 🔻🔻🔻Japan’s Nikkei 225 closed 0.72% DOWN 🔻 

📊 IN THE MARKETS

Weaker markets, Crude down, 🌱Norway, “Recession coming!”

📝 FOCUS

The world’s poorest paying for strong U.S.Why’s China reopening now?

📖   MoneyFitt EXPLAINS

🎓 The World Bank

📊 IN THE MARKETS

US stocks continued their decline on Wednesday, though at a gentler pace, with continued worries after Monday’s strong services sector data about what the Fed would do with interest rates next week, joined with concerns about global growth in the light of shockingly weak Chinese exports and the implications for Beijing’s reopening plans.

Crude oil prices reflected growing concerns that stalling global economic growth (including weak demand from China) would damage demand, with the benchmark Brent crude oil falling 2.8% to US$77 /bbl (“bbl” = Blue BarreL, a standard measurement of oil), its lowest level since the end of 2021, having already dropped 4% the previous day. Not only would demand be weak, but the expectation is that Russia would keep the taps wide wide open despite all the EU/G7 sanctions. Brent is named after a particular blend of “light, sweet” crude oil found in the North Sea and is taken as a global benchmark for trading.

🌱 Using money wisely saved from drilling North Sea oil, Norway has accumulated the world’s largest sovereign wealth fund at US$1.3 trillion. Going forward, it told the FT that it will use its investing clout to be more aggressive on environmental, social and governance (ESG) issues as a more vocal shareholder, and plans to vote against companies that fail to set a net zero target, overpay their top management, or do not have sufficiently diverse boards. US$1.3 trillion means that on average it ​​owns 1.5% of every listed company in the world! (It actually only holds positions in 9,000 companies.) With a view to ensuring prosperity for future generations, its investment mandate is on a 30 to 100-year timeframe.

Meanwhile, US government bond markets are yelling as loudly as they can that a recession is coming, with the yield curve inverted and plumbing levels not seen since the economically miserable late-70s to early-80s. It was so long ago that it was many years later that the yield curve was even considered a recession indicator!

IMPORTANT: Economic recessions are NOT the same as bear markets and do NOT always happen at the same time.

Mini Explainer: Inverted Yield Curves and Recessions

The yield on a bond is the interest rate you receive for a bond based on the price you actually pay it, and it goes down when the price goes up. When the yield curve is inverted, it means that the yields for short-term bonds are higher than the yields for long-term bonds.This is unusual because usually, long-term bonds have higher yields than short-term bonds as investors usually want higher returns (yields) to invest in long-term bonds or else they may as well get better returns from stocks.One argument is that investors buy longer-term bonds when there is uncertainty over the economic outlook and don’t want to take on risks like making real business investments, which are more economically sensitive (as are stock markets investments.)An inverted yield curve is often seen as a sign that a recession is coming.

📝 FOCUS

World’s poorest paying for strong U.S.

Markets have been weak in recent days on seeing the strength of the vast US services sector, which makes up 2/3rds of GDP and almost 3/4rs of non-farm workers. The strong service sector feeds into high inflation by 1) pushing up the cost of production, as wages are a key component, and 2) feeding strong domestic consumption since employment income is the main source of money used for consumer spending. High inflation is being tackled (belatedly) by the Fed through hiking the cost of doing business and increasing the cost of consumer borrowing (also known as interest rates) to slow down the economy. High interest rates have strengthened the US Dollar, especially this year (which also eased inflation a little by reducing the price to Americans of the stuff they import.)

But the unintended consequence is, tragically, that the “debt crisis facing developing countries has intensified,” according to the World Bank 🎓. The world’s 75 poorest countries, many of them in sub-Saharan Africa, will have to pay 35% more just in debt interest this year on loans taken out mostly over the past decade from US Dollar lenders which are now at much worse exchange rates on top of the much higher interest rates.

​​The World Bank is concerned that debt payments consume more of government spending when they are already struggling to provide education and health services, and social unrest (or worse) was the likely consequence of diverting cash to debt interest payments. 60% of the poorest countries are already in debt distress or at a high risk of it.

Most countries have seen debts rise over the last three years to pay for the pandemic and to offset energy and food inflation. However, poor countries have barely any ability to increase taxes to cover these costs, and many have been forced to seek loans from private lenders which are more opaque, more expensive and shorter term than borrowing from rich countries (“the Paris Club”.)

Why’s China reopening now?

China may have started its sudden reversal from zero-Covid not because of the countrywide protests after the Urumqi fire, but in spite of it. The real reason could have been a sneak preview of terrible trade data that was just released. Stocks in Hong Kong sold off sharply yesterday on data showing China’s November exports in dollar terms fell 8.7% from November the year before, well above the 3.5% that was expected and an order of magnitude worse than October’s drop of 0.3% year-on-year. 

Much, of course, can be attributed to weaker demand for China-made goods because of the global economic slowdown and high energy prices. Imports will reflect some of that, but will also show how the domestic economy is doing… and November’s imports were even worse than its exports, with the biggest drop in two and a half years at 10.6%, compared to a drop of 0.7% in October. Even the October export and import numbers were worrying at the time, showing the first declines since 2020 and were far below expectations (exports were expected to grow 4.5%.)

Global demand is probably only going to weaken further in 2023, so China will have to rely much more on the domestic consumer to drive growth, hence the relaxation measures that have been quickly rolled out to the delight of the markets (up to today, anyway.)

Trouble is that the country isn’t currently prepared for prioritising the economy rather than the battle against Covid-19, as spelled out in the recent meeting of the Chinese Communist party’s politburo. One model from Wigram Capital Advisors shows that if China opens too rapidly, it risks one million Covid deaths. This “winter wave” would see 20,000 deaths a day by mid-March with demand for intensive care (ICU) beds peaking at 10 times capacity by late March, exacerbated by a super spreader event in late January’s Chinese New Year holiday. CNY is the world’s largest annual human migration when migrant workers and professionals alike return to their hometowns.

Much of the rest of the world is “living with Covid” — China’s path there may not be as costless or as fast as recently bullish investors have been projecting.

Thank you for spending a few minutes of your time with us. Remember to take time for yourself and be thankful for what you have.

📖 MoneyFitt EXPLAINS

🎓 The World Bank

The World Bank is not a bank in the traditional sense. It is an international financial institution that provides loans and grants to countries for capital projects (roads, bridges, dams, education, health etc) and was established in 1944 at the Bretton Woods Conference, with its headquarters is in Washington, D.C. Its stated mission is to “end poverty and promote shared prosperity” by providing financial assistance to countries for economic development and by supporting programs that promote good governance and economic growth.The World Bank receives its funding from member countries, which contribute to the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD is funded by capital subscriptions from member countries, while the IDA is funded by donor countries through grants and concessional loans. The World Bank also raises funds through the sale of bonds on international capital markets.The World Bank works closely with the International Monetary Fund (IMF) which aims to stabilise the international monetary system and act as a monitor of the world’s currencies.In the past it has been criticised for its role in funding projects that have displaced indigenous people and led to environmental destruction and for its lack of transparency and accountability. It has also had accusations of corruption, nepotism, and lending money to countries with poor human rights records.

(See our IMF Explainer, here.)

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