Chinese stocks had their best day since 2008 yesterday, as the government stepped in after the latest selloff wiped out $200 billion in market value in just three days. And that selloff followed a very strong selloff that was already in place in more than a year due to a serious government crackdown, especially on most popular Chinese industries like technology. It appears that the latest selloff was so strong that it brought the Chinese government to pull out the white flag.
Even though the most popular Chinese names, like Alibaba lost more than 75% of their value since October 2020, the price chart looked like tens of falling knives that no dip buyer wanted to catch anymore. But China’s promise to ease the regulatory crackdown and support property and technology stocks could be a game, and a trend changer.
Nasdaq’s Golden Dragon China index gained close to 33% in just a single session, while Alibaba gained near 37%, JD.com jumped near 40%, and Didi, the Chinese Uber, rallied more than 41%.
Yet, risks prevail: we are still in a China that is no longer the land of opportunity of before Xi Jinping. Plus, US maintains a hardline on the Chinese listings in the US, insisting that the companies listed in the US should provide complete access to audits, with the threat of getting de-listed if they don’t comply.
Fighting inflation
The Federal Reserve (Fed) raised its interest rate by 25bp as expected for the first time since the beginning of the pandemic, and more importantly, said that the rate hikes will continue to tame inflation as the US economy looks strong enough to withstand a rapid normalization to avoid pushing the Fed into a darker stagflation environment.
It is now clear that the Fed’s and Biden’s top priority is now the price stability and there will be at least one 25bp hike in all of the next 6 meetings to come. The famous dot plot shows that the benchmark rate could end the year at about 1.90%, and then rise to about 2.8% next year, with dots placed above 3% for this year, and 3.50% for the next showing that some members are really serious about bringing inflation to the 2% target! Swaps linked to the next Fed announcement dates suggest that we will see a 75bp increase in the next two meetings, meaning that we could see a 50bp hike in one of them.
And last but not least, the Fed will also start shrinking its near $9 trillion balance sheet at the ‘coming meeting’, which is a big potential for pulling back liquidity. Of course, everything that’s planned right now depends on how the Ukrainian situation evolves – and no more on the pandemic, as the statement omitted Covid, expect from a reference to the pandemic’s impact on inflation. And the uncertainties that come along with the Ukrainian war means that nothing is sure for now, apart from the Fed’s willingness to take control on rising inflation to give itself some maneuver margin on its policy for the future.
Tech led gains
The kneejerk reaction to the decision was an early selloff then a strong rebound. The question is, could it last?
A gentle Fed was the biggest driver of the post-pandemic market rally, and we will see how a less supportive Fed will impact the company valuations. So far, the earnings growth remained strong for many companies with strong business fundamentals, that’s why picking the right sectors and the right stocks will be important. However, the idea that the reflation trade will mostly support the value names, and leave the technology stocks in the dark doesn’t necessarily hold. At least the kneejerk reaction to the Fed decision hinted that investors wouldn’t let go of their tech stocks just yet. The Dow Jones gained 1.50%, as the S&P500 gained around 2.20% and Nasdaq, full of technology and growth stocks which are normally the most sensitive to the changes in interest rates rallied 3.77%.
