Forcefully
The ECB raised interest rates by 0.75% this week, the biggest move since 1999. Similar to the Fed, policymakers in Europe are trying to bring down record high inflation (9.1%), at the expense of economic growth. Further increases are expected and future decisions remain “data-dependent”.
Across the pond, Chair Powell took on a hawkish tone in his last public comments before the FOMC meeting later this month. This did not come as a surprise and S&P 500 ended the week almost 2% higher.
Notable quotes: “History cautions strongly against prematurely loosening policy” and “Restoring price stability will take some time and requires using [the] tools forcefully to bring demand and supply into better balance”.
Market expectations point to another 0.75% increase for the upcoming FOMC meeting, putting the fed funds rate at 3.0-3.25%.
Prime rate
The US August CPI just announced yesterday was higher than expected, and the chances of the Federal Reserve raising interest rates by 0.75% on September 21 should be certain. It is expected Hong Kong banks should also start adding the Prime rate.
At present, there are a handful of banks that raised the upper limit of the cap for HIBOR based mortgage – capped moved up from P-2.65% to P-2.4%.
Sino-US tension resurfaces
President Joe Biden is holding back on a decision to remove Trump-era tariffs that might shave 1% off CPI in a best case scenario, even though there is no consensus on how effective this would be. Making a decision before either US midterm elections and CCP congress carries a certain amount of political risk that President Biden is unlikely to take before November. Joe signed an executive order laying out a strategy to bolster domestic biomanufacturing and reduce reliance on China for new medicines, chemicals and other products on Sep 13. Wuxi Biologics (2269.HK) dropped 20% on the news date. This again shows the US wants to separate tiles with China. This is negative sentiment for foreign investors.
Warren Buffett has taken some profit on BYD, China’s largest EV maker. SoftBank has offloaded substantial investment in Alibaba.Naspers Ltd, Tencent’s largest shareholder, continues on its path to sell $7.6bn worth of Tencent Holdings Ltd.
Tencent’s share price remained weak since Naspers announced its interest to sell off all holdings to fund buyback in August.
We will be watching the Chinese Communist Party congress set to take place next month where we could see significant reshuffles of the top economic positions.
Early or late?
A few weeks ago, we wrote that it was too soon to tell if the rally we saw in July was going to be persistent. According to RBA Advisors, in seven of the last ten bear markets going back to the 1960s, it has been better to be late than early as this reduces downside potential and gives one more time to assess incoming fundamental data.
However, if we look at the bear markets where the Fed has been more involved (2009 and 2020), we get a mixed picture. Investors who were early in 2020 did better while investors who were early in 2009 did worse.
History tells us that markets do eventually recover and investors who adopt a dollar cost averaging (DCA) strategy do better over the long run, particularly when markets are volatile.
Market Stats
