MoneyFitt

21 December 2022

Ha🐪🐫y Wednesday🎄!

US large-cap S&P 500 closed 0.1% UP ▲ Tech-heavy Nasdaq Composite closed 0.01% UP ▲ Pan European STOXX Europe 600 closed 0.4% DOWN 🔻 HK’s Hang Seng Index closed 1.33% DOWN 🔻 Japan’s Nikkei 225 closed 1% DOWN 🔻 

📊 IN THE MARKETS

BOJ hike, Cheerio! China reopening fears, Stock Connect, 🌱KCIII£50

📝 FOCUS

Pivot… finally! The Bank of Japan hikes interest ratesPivot… the other way? South Korea’s rate hikes over soon?

📖   MoneyFitt EXPLAINS

🎓 Exchange Rates 

📊 IN THE MARKETS

Markets in the US closed slightly higher overnight after four down days in a row following the latest hikes from the US, EU and UK central banks last week along with the accompanying “hawkish” comments telling investors to brace for interest rates that will be higher for longer…. now followed (at last) by the Bank of Japan (BoJ) with a surprise tweak of its monetary policy (see Focus below). US government bonds followed Japanese Government Bonds (JGBs) down, meaning that yields, the interest rate you receive at the price, went up.

Meanwhile, supporting the idea that at least part of the inflationary pressures have of late been based on company’s passing through costs, General Mills (GIS), the maker of Cheerios, Häagen-Dazs and Pillsbury dough raised its sales and operating growth forecasts for the fiscal year which ends in May 2023. Shares were down 4.6% but are still up a stunning 24% since the start of the year. GIS sees cost pressures continuing, with inflation of 14-15%, though packaged foods companies in general have been able to pass on higher prices to consumers, who have become resigned to prioritising essentials such as food –including pet food!– over discretionary items, while lockdowns may have at least temporarily reawakened the joys of home baking.

China authorities reported just five more Covid-related deaths on Tuesday while international concern is growing about the abrupt and chaotic reopening. Concerns are about both the potential health/humanitarian crisis, with various research groups predicting as many as 2.1 million deaths, as well as the heightened potential of mutation into yet more variants as the virus rips through a population with no herd immunity and less-effective non-mRNA vaccines. Others point to the possible impact on global supply chains and what that may do to inflation that had appeared to peak.

Meanwhile, cities across China are scrambling to install hospital beds and build fever screening clinics (which was not done during the three years of the zero-Covid policy) while blood banks are running short as Covid fears keep donors away, adding additional stress to an already strained medical system.

The Hong Kong Stock Connect scheme is being expanded by making more companies available for trading. Foreign investors will be able to buy an additional 3,000 companies listed in Shanghai and Shenzhen via Hong Kong, while mainland investors in turn will be able to invest in foreign companies listed in Hong Kong (provided it’s a constituent of one of the Hang seng indices) such as Prada, Samsonite and Prudential.

Mini-Explainer: The Hong Kong Stock Connect Scheme

The Stock Connect is a mutual market access program that allows investors in Mainland China to trade stocks listed on the Hong Kong Stock Exchange (HKSE), and vice versa, with the goal of promoting closer economic and financial ties. Investors in Mainland China can trade “Southbound” in qualifying stocks on the HKSE through their brokers, using the same trading platform and rules as HK domestic investors. Similarly, investors in Hong Kong can trade stocks “Northbound” the same way.Volumes in each direction are limited by daily quotas set by the China Securities Regulatory Commission (CSRC)

🌱And coming up in 2024, KCIII£50 appropriately green as it will be replacing retired notes and for any net increase in supply only:

📝 FOCUS

Pivot… finally! The Bank of Japan hikes interest rates

Yesterday, the Bank of Japan stunned markets by changing its bond yield control programme. The yield of 10-year Japanese Government Bonds (JGBs) can now trade 50 basis points (0.50% since one basis point is 0.01%) either side of the unchanged 0% target. This is a huge move as the previous band was only 25 basis points and the 10-year JGB yield immediately jumped to 0.46% from the previous cap of 0.25%. Short-term JGB yields remain at -0.1%. Investors had expected no changes to its yield curve control (YCC) until Governor Kuroda steps down in April.

A “wider band” in the current environment effectively means “higher” — in other words, with the upper limit going from 0.25% to 0.5%, the BoJ is finally (finally!) “pivoting” to a higher interest rate policy to combat inflation, which in October hit a 40-year high of 3.6% (target 2%.) Globally, this is low, but Japan’s economy has long suffered from low domestic growth and the threat of deflation.

Japan is the last major economy to do so, with its ultra “loose” (low interest rate) regime leading to dramatic weakness in the Japanese Yen against its major trading partners. In the last one year, the US Dollar has also been very strong and can now buy 15% more Japanese Yen (JPY), though that’s down from 30% at the peak in October (when the USD started to weaken against other currencies as well.) This latest move from the BoJ sent the JPY up and the stock market sharply lower.

The Yen’s weakness has led to record trade deficits by making imports more expensive for the Japanese, including raw materials, which has weakened earnings and caused the overall economy, measured by the Gross Domestic Product (GDP), to unexpectedly shrink in the third quarter. 

On the other hand, a stronger Yen will mean that the windfall gains for Japanese exporters in terms of competitiveness as well as in translating the foreign currency earnings of its overseas sales, whether they actually bring the money home or not, will be less. But higher interest rates will generally put pressure on the domestic economy, though banks and insurers will benefit from higher lending rates and the wider gap between short- and long-term government bond yields.

Pivot… the other way? South Korea’s rate hikes over soon?

Fierce East Asian economic and export rival South Korea, on the other hand, had been expected by some traders to become one of the first major economies to pivot the other way. The BOK increased the key rate to 3.25% in November along with a statement that most monetary board members expected rates to peak at 3.5%.

However, Bank of Korea (BOK) Governor Rhee Chang-yong somewhat dampened expectations on Tuesday, saying that “this was not a promise on our future direction.” Inflation remains too high at around 5% (vs target 2%) and it is still “premature to discuss any possible rate cuts.” 

Korea started tightening monetary policy long before other countries with a rate hike in August 2021 (while the Fed, ECB and BoE were still arguing that inflation was transitory) aimed at arresting the fall of the South Korean won (KRW) against the dollar, and cooling an overheating property market.

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

🎓 Exchange Rates  

When you show the exchange rate between two currencies (known as a currency pair) you put the base currency first, so the USDSGD rate shows how many SGD you can get with one USD. If that number goes up, the value of the USD has gone up while the SGD has gone down against it.Usually, the USD goes first in the pair because the FX for most trade is conducted in USD, so people want to know what USD1 gets them. In a few cases, for historical and/or political reasons, a few currencies are quoted before the USD, like the British Pound (GBP, also called “Sterling”), the Euro (EUR)  and the Aussie Dollar (AUD).Outside of these, a currency pair can be quoted either way, e.g. CADTHB for how many Thai Baht one Canadian Dollar (a “Loonie” – which is not the national bird) can get you, or vice versa THBCAD. Often they will settle on a commonly used direction, but there aren’t really any rules.When you ask somebody “the exchange rate” of any currency (other than GBP, EUR and AUD,) it is often assumed by default to be the number of that currency per USD1. – Example 1: Q) What’s the Japanese Yen trading at? A) JPY132 (i.e. the USDJPY rate.– Example 2: Q) Where’s “Cable” (trader talk for the British Pound against the US Dollar)? A) USD1.22 (i.e. the GBPUSD rate.)

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