The good news with China’s reopening is that it should boost global growth.
The bad news with China’s reopening is that it will not only boost global growth, but also energy and commodity prices – hence inflation, the interest rate hikes from central banks and potentially the global Covid cases – which could then give birth to a new, and a dangerous Covid variant, which would, in return, bring the restrictive Covid measures back on the table, and hammer growth.
Note that the reasoning stops here right now, the risky markets are painted in the red, but we could eventually go one step further and say that if the Chinese reopening hits the global health situation – hence the economy badly, the central banks could become softer on their rate hike strategies. But no one is cheery enough to see silver lining anywhere.
This year really needs to end, now!
So, Wednesday was marked by further selloff across European and US markets. The S&P500 slid 1.20% and closed below the 50% Fibonacci retracement on the latest rally. The index gave back half of gains collected from October to November. Trend and momentum indicators, and more importantly market sentiment remain supportive of a deeper dive to meet the major 61.8% Fibonacci retracement, at 3724 mark.
Likewise, Nasdaq lost another 1.32%, and the dips don’t look like anyone wants to grab them right now.
In Europe, the DAX struggles to keep its head above the 50-DMA, near 13925.
Across the Channel, despite political shenanigans and Brexit’s knock-on effects, high inflation and the cost-of-living crisis, Britain’s 100 biggest companies are preparing to close the year with small gains, while the S&P500 has lost more than a fifth of its value.
First, the British companies had to compensate for the weakening sterling this year – but that’s also true for the DAX, for example, but the DAX is also preparing to end the year around 15% lower. So, it’s not only an FX story.
Second, and the most relevant, the fact that the FTSE 100 is heavily crowded in energy and mining stocks is what made the FTSE 100 perform so well this year. The two biggest market caps in the index, which make up to 20% of the index, Antofagasta and Fresnillo – both mining stocks, are preparing to close the year in the positive.
Antofagasta is up by 20% ytd, while Fresnillo, which is a goldminer and suffered from subdued gold prices this year is still up by 6% a day before the trading year ends.
Other energy companies like BP and Shell are up by 40%.
Plus, British big caps make most of their revenues in terms of US dollars; a good thing for a year when sterling lost up to 23% against the greenback at some point and is still down around 10% right now.
And I believe that the FTSE 100’s outperformance could stretch into the new year. If the Chinese reopening brings along another bump in inflation due to higher energy and commodity prices, the FTSE 100 could continue offering a good shelter to those willing to hedge against an energy-led global inflation to temper the negative effects.
Of course, the biggest British companies do not reflect the underlying British economy, so the FTSE 100’s good performance won’t change the fact that smaller, and domestic focused companies will likely continue to suffer from high inflation, recession and perhaps another year of political turmoil as a cherry on top.