The US stock market saw quite a bit of volatility in the month of November as all eyes are lasered on the US Federal Reserves on what they will do next with the interest rates. US stocks rallied sharply higher after Fed Chair Jerome Powell signaled a slowdown in the pace of its aggressive rate-hiking campaign in December and raised interest rates by 0.5% instead of the previous 0.75%. Powell stated that "Moderating the pace of rate increases may come as soon as the December meeting," and added that rates were approaching "the level of restraint that will be sufficient to bring inflation down,” but cautioned that questions remain on how high rates need to go and for how long. The S&P 500 logged a gain, as the index hit its highest level since early September.
The ISM Manufacturing PMI slipped into contraction for the first time since May 2020, coming in weaker than expected at 49.0 in November, down from 50.2 in October. Headline CPI fell by more than expected in November to 7.1% from 7.7% in the previous month. This signals that the Fed's rate hikes could be taking effect, as higher borrowing costs weigh on demand for goods.
After the strong rally, US equities declined as strong services sector data sparked fears that interest rates will stay higher for longer to bring inflation down to the 2% target. Further fears that the projected rates to peak higher at 5.1% through 2023 as inflation remains well above the target 2% level, dented market optimism, sending the market back down again.
This brought the market back to square one, with little movement overall.
China suddenly exit zero COVID
November saw a spat of protest against COVID lockdown measures after 10 people were killed in a fire in Xinjiang. Rumors that the tragic incident occurred as a result of the stringent lock down measures, leading to the residents trapped in their flat and the fire-fighters unable to reach them in time. The incident ignited a number of protests across major cities in China, calling for a loosening of COVID measure. At the same time, China saw a sharp rise in COVID cases in numerous cities and faced with the prospect of executing another unpopular city wide lockdowns, the China government decided to abruptly change their long standing stance of zero COVID measures instead, and started to loosen the COVID measures. Mainland China's international borders remain largely shut, but recent decisions to abandon testing prior to domestic travel and disable apps that track people's journey history have freed up people to move around the country.
At the same time, China's economy continues to weaken as analysts estimate grew just 3% this year - its worst performance in nearly half a century. Xi and his leaders ended their two-day Central Economic Work Conference and promised to step up policy adjustments and strengthen coordination to support an economy. But the excitement that met the policy U-turn allowing them to travel has cooled amid concerns that China is unprepared for the coming wave of infections, and the blow it could deliver to the world's second-largest economy.
The up and coming COVID wave promises to potentially deal another blow to China's economy as it does not seem to be well prepared with the sudden U-turn in COVID policy, but the potential of China joining the world with business as usual, is no doubt exciting for investors as China's stock market has been under pressure for the past few years ever since it closed up. The opening will also potentially usher new waves of tourism and investments around Asia, while also opening doors to talks with the now estranged western economies to warm up their icy relations.
Portfolio Performance
The portfolio performed well in the month of November with Cash gained 1.17%, CPFIS gained 2.54% and SRS gained 1.35%. The previous proposed switch to floating rate bond was not executed as the returns of these assets lagged behind our current bond positions, as the expected slow down of rate rise has added pressure to its performance. Thanks to the potential opening of China's economy, Asian high yield bonds had a shot in the arm, leading to an outstanding performance in recent weeks. I expected that things in China will get worse before it gets better, so our long standing position in focusing in equity markets may get re-aligned back to Asia once the worst is over.
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