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Investor Anxiety in China: A 25-Year Low in Confidence

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A Chilling Outlook for Investors

The economic landscape in China, the world’s second-largest economy, has left investors anxious and uncertain. Recent data reveals a worrying trend as China grapples with a decline in foreign investments, marking a significant milestone. This is the first time in 25 years that the country has experienced such a decline, putting into question its ability to attract foreign companies and investments.

The Data Speaks

The stark reality is evident in the numbers. Data published by the State Administration of Foreign Exchange (SAFE) shows that foreign direct investment (FDI) into China has taken a negative turn. In the third quarter of 2022, China’s direct investment liabilities were at a disheartening minus $11.8 billion. This represents a sharp contrast from the third quarter of the previous year, when the figure stood at a more promising $14.1 billion.

 A Troubling Milestone for China

The gravity of the situation becomes apparent when one realizes that this is the first time the gauge has displayed negative values since records began 25 years ago. It is a clear indication that foreign companies are not reinvesting within China, but rather, they are withdrawing their capital from the country.

Defining Direct Investment Liabilities

To understand the implications fully, it’s essential to clarify what “direct investment liabilities” encompass. This category includes profits belonging to foreign companies that have not been repatriated or distributed to shareholders. It also includes foreign investments in financial institutions within China. This negative trend signifies a reluctance to repatriate profits and a decline in foreign investments within the country’s financial sector.

Geopolitical Tensions and Investor Caution

The reasons behind this unsettling trend are multi-fold. Geopolitical tensions undoubtedly play a role in this exodus, as the global political landscape becomes increasingly uncertain. However, foreign companies and investors are also growing cautious of the mounting risks in China. These risks include the possibility of sudden raids and detentions, which add to the sense of insecurity surrounding investments.

Vanguard’s Exit

A poignant example of this trend is Vanguard, the world’s second-largest asset management firm, announcing its plans to close its Shanghai office after December 2023. Vanguard’s decision stems from the sale of its stake in a joint venture with local partner Ant Group. The exit, which was initially reported by Bloomberg, indicates that even industry giants are reevaluating their commitment to the Chinese market.

Beijing’s Struggle

Despite Beijing’s efforts to reverse capital outflows and reassure investors, these attempts have fallen short of restoring confidence. One of the initiatives aimed at portraying China as an open market and improving trade ties, the China International Import Expo (CIIE), faced criticism from the European Union Chamber of Commerce in China. The Chamber described the event as more of a “showcase” than a concrete step towards facilitating foreign investment.

Seeking Solutions

In its endeavor to boost economic growth, China’s government has taken various measures, including approving one trillion yuan in sovereign bonds. These bonds are mainly directed towards funding infrastructure projects. Additionally, China’s sovereign wealth fund intervened in the stock market, one of the poorest performers globally, to help improve its performance.

Furthermore, the relaxation of capital controls in Beijing and Shanghai aimed to encourage foreigners to move their money more freely into and out of the country. The People’s Bank of China also engaged with prominent Western companies like JP Morgan, Tesla, and HSBC, pledging to further open up the financial industry and optimize the operating environment for overseas companies.

Lingering Skepticism

Despite these concerted efforts, global investors remain cautious. China’s increasing scrutiny of Western companies and an ongoing structural economic slowdown contribute to this apprehension. A survey by the American Chamber of Commerce in Shanghai underscored this skepticism, with only 52% of respondents expressing optimism about their five-year business outlook, the lowest level since the survey began in 1999. This figure has dwindled from 55% in 2022 and a robust 78% in 2021, highlighting the ongoing challenges faced by investors in the Chinese market.

The Unlikelihood of Rate Cuts and Why That’s Not So Bad

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The Federal Reserve’s interest rate hike cycle has been a major concern for Wall Street, as it has battered markets and tested investor morale. While a pause in interest rate hikes seems likely, experts suggest that cuts may be farther off than expected. In this article, we will explore why the Fed probably won’t cut rates anytime soon and the potential consequences of cutting rates prematurely.

Why the Fed Is Unlikely to Cut Rates Anytime Soon

According to experts, the Federal Reserve is unlikely to cut rates anytime soon as long as the economy remains strong. They suggest that a rate-hike pause could be better for stocks than a cut. Although prices are stabilizing, inflation is still above the Federal Reserve’s two percent target, while American unemployment is at a record low. The US housing market is cooling down, but low inventory and persistent demand are pushing home prices higher in some parts of the country. These factors indicate that the Fed has no strong reason to pivot to lowering rates yet.

The Fed Cuts Rates Only in a Crisis

Kara Murphy, chief investment officer at Kestra Investment Management, stated that the Fed rarely cuts rates without some crisis in between. The last time the Fed slashed rates was in March 2020, after an emergency meeting. During this time, the Covid-19 pandemic caused US markets to tumble into the first bear market in 11 years. This resulted in some panic, as many feared that the global economy would go into a deep recession.

The recent collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank have raised concerns about potential turmoil in the banking sector and credit standards tightening. However, these disturbances have been limited to regional banks, and financial and economic leaders have assured that the banking sector remains stable.

According to Liz Ann Sonders, chief investment strategist at Charles Schwab, a significant downturn in the banking sector, labor market, or the economy would need to happen for the central bank to consider lowering rates in July. Sonders also added that the Fed would lose its credibility if it decided to cut rates without any valid reason after hiking them previously.

Cutting Rates Prematurely Could Have Grave Consequences

While the Fed may bring down rates soon, it’s not guaranteed to benefit the stock market. Credit Suisse’s report suggests that following a pivot to rate cuts, stocks tend to perform tepidly compared to a pause. The S&P 500 has historically climbed by 16.9 percent on average in the 12 months after the last hike of a Fed rate cycle, but it has fallen by one percent in the 12 months following the first rate cut. The analysts warn that the upside would be limited if the Fed were to ease rates in July. Premature rate cuts could have severe economic consequences, as seen between 1972 and 1974 when inflation rose sharply after the Fed cut rates. 

The Fed is unlikely to be in a hurry to cut rates this time, according to Marco Pirondini, US head of equities at Amundi. However, a Fed rate cut this year is not completely out of the cards, says Nicole Webb, senior vice president at Wealth Enhancement Group. The Fed may want to lower rates back down, but it’s unlikely to do it at the historical pace it’s raised them over the past year. Webb suggests that the Fed can slowly pace the rate down to 2.5 percent without causing inflation to spike.

Final Thoughts

While a pause in interest rate hikes seems likely, experts suggest that cuts may be farther off than expected. Inflation remains sticky, and the economy has remained strong, making it unlikely that the Fed will pivot to lowering rates anytime soon. Cutting rates prematurely could also have severe economic consequences, as seen in the past, and could damage the Fed’s credibility. The Fed is unlikely to be in a hurry to cut rates this time, and while a rate cut this year is not completely out of the cards, it’s unlikely to happen at the historical pace the Fed raised them over the past year.

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Famous Investor Warns of an Ominous Bubble in the Financial Markets

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Jeremy Grantham, the co-founder of investment firm GMO and the famous investor who predicted the dot-com crash in 2000 and the 2008 financial crisis, has sounded the alarm yet again. He warns that the markets are in the midst of one of the greatest bubbles in financial history, and the recent turmoil in the banking sector is just the beginning. The bubble, he believes, is set to burst, and the resulting economic downturn could be severe.

The Bubble and Its Causes 

Cheap money has led to a frenzy in multiple US markets, pushing valuations of stocks, government bonds, real estate, and cryptocurrencies to excessive levels. This widespread exuberance has created a “pressure behind a dam,” and Grantham sees much steeper declines on the horizon.

The bubble in the stock market is particularly concerning as stock valuations remain “way above any long-term traditional relationship” to corporate performance. As the US economy enters a recession and corporate earnings begin to take a hit, the strain on the financial system could grow.

The Coming Downturn

Grantham sees uncomfortable parallels between the current market and the tech bubble of 2000 and the US housing market crash of 2008. What’s even more worrisome is that now, bubbles in the stock and real estate markets are poised to burst simultaneously.

This scenario played out in Japan in the 1990s, a period that unleashed a long economic stagnation that still haunts the world’s third-largest economy to this day. Grantham warns that the instances when people tried to break a bubble in the stock and real estate market together are “fairly ominous.”

The Way Out

Grantham blames central bankers for the inception of the latest market bubble. He believes their pursuit of some of the policies in recent decades artificially drove up the value of financial assets to high levels and set the stage for crashes.

He suggests that the current Fed chair, Jerome Powell, should follow the example of Paul Volcker, who raised interest rates to unprecedented levels to control inflation in the late 1970s and early 1980s. Volcker succeeded in suppressing price rises, though his policies also led to recessions.

Grantham warns that longer-term trends could prop up inflation for years to come. Climate change resulting in extreme weather and more intense and frequent natural disasters is disrupting the supply of commodities and raising food prices. In addition to that, aging populations also pose a risk as smaller workforces may command higher wages.

Investor Outlook

Grantham’s bearish views suggest investors should prepare for a rocky ride ahead. While there may still be opportunities to make money, the short-term outlook is grim as asset prices come back down to earth. Grantham suggests investors should “count on being surprised” as the bubble deflates.

Investors should exercise caution and consider their options carefully. It may be wise to diversify their portfolios and reduce their exposure to overvalued assets. Opportunities to make money will emerge as the bubble deflates, but the short-term outlook remains forbidding.

Analysts at Bank of America, Goldman Sachs, and Morgan Stanley have more optimistic outlooks for the markets. Still, Grantham’s track record of predicting market crashes makes his warnings worth considering as investors navigate the markets in the coming months.

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Oil Prices From Around the World Rise Above $80

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As crude oil reached beyond the 80-dollar mark, prices of coal, carbon, and European gas have all hit record highs. With this upsurge, it has become apparent that an energy crunch, which would have an adverse effect on economic growth, is imminent. 

In fact, Brent crude skyrocketed as much as 0.9 percent to $80.22 a barrel, achieving a three-year high for the second consecutive day before settling 0.6 percent lower at $79.09. It even posted three straight weeks of gains, whereas U.S. crude futures rose $1.47, or 2%, to settle at $75.45 a barrel, its highest since July, after rising for a fifth straight week.

Now that prices have been steadily rising for seven consecutive days alongside the energy crisis in Europe, analysts strongly foresee that they will continue to do so during surging demand and tight supplies. 

Because European benchmark gas prices that are up for delivery next month have climbed another 10 percent, costs have doubled since the middle of August while the price of offsetting carbon emissions continued to rise, moving past €65 a ton in intraday trading last Tuesday.

According to investment bank Goldman Sachs, Brent could hit $90 per barrel by the end of the year, warning that rising input costs, higher gas prices and weaker growth were likely to weigh on European corporate profit growth for 2021. It raised its year-end forecast for Brent crude to $90 per barrel, considering that global supplies have tightened as a result of the fast recovery of fuel demand from the outbreak of the Delta variant of the coronavirus and Hurricane Ida’s hit to U.S. production.

“When growth slows, it becomes harder for companies to pass on higher input costs, which is the main risk for net income margins,” the Wall Street lender proclaimed. “While we have long held a bullish oil view, the current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts,” it added.

The said growth came into existence when the pound experienced its biggest one-day drop against the dollar on Tuesday, tumbling 1.3% to just under $1.3530 despite inflation fears. It was its lowest since January, as investors sought a safe haven in the dollar.

In an interview, Jordan Rochester, a currency analyst at Nomura, said that rising inflation concerns are making sterling-denominated assets less attractive. On the other hand, Brent crude has already gained about 55% for the year to date. West Texas Intermediate (WTI) also rose to around $75 a barrel.

In light of the recent developments, global oil demand is expected to reach pre-pandemic levels by early next year as the economy recovers. However, producers and traders from around the world shared that spare refining capacity could still weigh on the outlook.

As expressed by Greg Hill, president of Hess Corporation, global demand is seen rising to 100 million barrels per day by the end of 2021 or in the first quarter of 2022.