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23 January 2023 - Happy New (Chinese) Year !

China is celebrating this week its new lunar Year, which belongs to the Rabbit. The rabbit is the fourth animal in the Chinese zodiac. In the Chinese culture, the rabbit is known to be the luckiest out of all the twelve animals and it symbolizes mercy, elegance, calm and beauty. It is also considered a good omen for prosperity and peace.

Markets were under the spell of profit taking, after a two-week rally. A big Friday rally for Technology stocks saved the week for Nasdaq which posted a small gain of 0.5%. The S&P500 and most of Europe fell by 0.6% on average, with the exception of the Swiss SMI index which finished the week unchanged. Chinese stocks, on the contrary, posted another positive week (CSI 300 +2.5%), ahead of the week-long holiday. In terms of sectors, the only positive were Technology, Energy and Communications (due to Netflix's gains which spilled over to Facebook, Google and other companies in the sector).

A lot of speculation on the next move by the ECB. Bloomberg reported that according to unnamed officials the governing council is thinking of a 25bp hike in March after going to deliver an almost certain 50bp in early February. But the December ECB minutes which were published on Thursday, largely mirrored the very hawkish tone from President Lagarde in the post-meeting press conference. Several members were in favor of a 75bp increase. It appeared that the 50bp hike decision was a big compromise, and in return the 75bp supporters pushed Mrs Lagarde to present a very hawkish message in the press conference.

At the same time, the consensus is turning for a slowdown rather than a recession in Europe and in the US. The voices who believe that Europe will escape with just a scratch from the energy crisis, the unrelentless rise in interest rates and the high consumer prices, are increasing. Goldman Sachs and UBS were the latest to upgrade their forecasts for Europe. The IMF is also contemplating to upgrade its 2023 global GDP forecast, after cutting it several times last year. But besides the official forecasts of economists, the market participants have also started warming to this theme, that a recession can be avoided. This change in sentiment explains the explosive start of equities in the new year. Avoiding a recession means profits and profit margins will be able to stay at the same levels as last year, if not even grow slightly and eventually translate to higher equity prices as valuations should also improve in terms of price to earnings ratios.

But a second consecutive month of weak Retail Sales in the US was announced for December. Retail Sales fell 1.1% vs consensus of -0.9% , but the details painted an even worse picture. Previous months (October and November) were also revised down by 0.1%. Put these together and it is easy to conclude that consumer spending in the final quarter of 2022 will be lower than expected in the GDP forecasts for the quarter.

In more positive news, the December PPI in the US rose less than expected. In particular, the Headline Producers Price Index (PPI) slowed to 6.2 % from 7.3% in November and was almost half of the peak at 11.7% last March. The monthly drop of the PPI was really significant at -0.5%, vs expectations for just a 0.1% drop. The Core PPI inflation slowed to 5.5% from 6.2% a month earlier and again almost half of the peak at 9.7% in March. PPI inflation numbers are very important because thyy lead and eventually feed into the consumer prices. Having producers prices moving down in a fast way can only mean good news on the inflation front in the next few months.

The Bank of Japan chose to be dovish in its latest meeting. Against fears that the BoJ will raise again the upper limit of the yields at which the JGBs are "allowed" to trade without intervention, they made no changes to their policies. And although they acknowledged the fact that inflation keeps rising (latest figure, 4% for December) they chose the path of patience as they believe that inflation will eventually come back towards the desired 2% level, by early next year. Let's not forget that the Japanese economy has been plagued for decades by the opposite of inflation, that is deflation or falling consumer prices. Deflation is equally bad if not worse than high inflation, and hence Japanese authorities have welcomed the return of inflation, if it is to stay withing reasonable limits (2-3%).

Bonds had a volatile week and ended almost unchanged. The initial rally in prices led by the speculation about the ECB's slowdown in March, the 25bp increase now expected by the FED in February as well as the dovish BoJ meeting and the good PPI data, turned to a mini sell-off on late Thursday and Friday. The catalyst behind the profit taking was the return of the hawks from the ECB with interviews and the publication of the minutes which reminded to everyone that we are maybe still not close to the end. The US 10-year yield reached a low of 3.35% before returning to 3.45%, while the German equivalent tested the 1.95% levels before zooming higher to 2.15%.

The dollar continued to be sold. The EURUSD is now trading above 1.0900 as the ECB is positioned currently to be more hawkish than the FED. Let's not forget that the ECB started its interest rate hike campaign at a later stage and at a much lower starting point, than the FED. If we add the fact that the gloom about Europe seems to be receding, the market has decided to push the USD lower against the EUR, for now.

In corporate news, we should highlight the results of Procter & Gamble, which also have implications for inflation. The company reported 5% organic sales growth for the previous quarter, of which 10% was price increases. This means that volumes were down almost 5% and shows that the 2022 price increases are already denting demand even for products that are essential for our every day lives. As Nestlé a few months ago, Procter & Gamble is losing pricing power, which can only be good for consumer prices and inflation down the road.

Microsoft, Tesla, Johnson&Johnson and General Electric are among the biggest companies to report earnings this week.

More layoffs are being announced in the technology sector in the US. After Microsoft which recently decided to axe about 20k employees, it was Google which announced the firing of 12k people, or about 6% of its workforce.


Chart of the Week :

Positive technical signs for Chinese equities.

China has been out-performing most other major equity markets this year. The MSCI China Index is up 50% from its low in mid-October and 11% higher since end of December. Of course there is room for correction ahead, but the technical set-up looks promising. It crossed its 50-day moving average (grey dotted line) in late October and passed its 200-day moving average (green dotted line) just as 2023 started. Even more importantly, the 50 day is looking ready to cross above the 200 day any time soon, a formation which is called the "golden cross" and is usually a very bullish sign. Of course, these are just technical observations and investment decisions should not be based solely on these.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : KSH, Facset. Photo: GETTY


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