by Chris Black
The most surprising development of 2023 in macro finance was, to me, the Fed deciding not to out-hawk other central banks (which it could’ve done very easily) but out-dove them, i.e. signal that the Fed will cut first, something very positive if you are in Europe or England.
This has already and will continue to weaken the dollar in H1 next year (and potentially beyond), which will support U.S. risk assets and Chinese FX, the latter of which may also support Chinese risk assets).
U.S. dollar weakness tends to support U.S. risk assets (U.S. stocks) as portfolios are rebalanced from risk-free Treasuries and other dollar denominated debts into risky stocks.
A weaker dollar also increases the buying power of foreign market participants via a more favorable FX rate.
“China’s failed cyclical recovery of early 2023 turned into a tailwind for risk assets mostly because the main focus of investors this year has been on inflation.
The deflationary impulse (t.me/marketfeed/469351) from China’s excess capacity and weaker currency helped G10 and EM economies and policy makers subdue the largest inflationary shock since the 1970s.” — GS FICC making the case that U.S. risk assets (stocks) did well in 2023 because China failed to kickstart a reflationary cycle.
The more dovish Fed and recent weakening of the USD has relieved pressure for the yuan to depreciate further. Insofar as this continues, it will support both U.S. risk and Chinese risk.
The momentum of the Chinese equity market still looks horrendous.
Even with the Fed tilting dovish and the US dollar rolling over, Chinese stocks have not responded.
This has reversed recently with capital pouring back into Chinese bonds, and Chinese equity outflows slowing .
The valuation gap between the Chinese equity market and most other major markets is close to records.
Unless the Chinese economy begins to fall apart, Chinese equities offer a lot of value.
That said we are bullish Chinese risk and yuan bonds for 2024.
Chinese deflation (t.me/marketfeed/469351) may reverse soon.
If you’re an investor I think it’s pretty clear that there’s a shitload of money to be made in 2024, everything is set to boom – stocks, crypto, etc.
I’m no financial expert but the central bankers want a Biden win and they will juice the economy to secure it.
