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MARKETS
The recent downward trend in U.S. stock indexes, driven by diminishing rate cut expectations, is showing signs of stabilizing as U.S. bonds calm down.
Investor sentiment was pressured on Monday as hopes for a March interest-rate cut by the Federal Reserve diminished. Earlier in the year, expectations of Fed policy easing had fueled gains in stock indexes. However, despite the recent fluctuations, major indexes are still close to their record high, suggesting that while rate cut expectations and earnings reports may drive short-term fluctuations, the overall market sentiment remains relatively optimistic, with investors closely monitoring both economic data and corporate performance.
The U.S. bond market rebounded, with 10-year yields falling precipitously, providing some welcome eye candy for U.S. stocks and general interest rate-susceptible sectors of global capital markets. Indeed, with yields falling ahead of the upcoming $42 billion sale of 10-year Treasury bonds, dealers are positioning for good demand after a solid start to this week’s ramped-up issuance sizes.
Despite cautious remarks from Federal Reserve officials, including Fed Bank of Minneapolis President Neel Kashkari and Cleveland Fed President Loretta Mester, indicating that the central bank is not in a hurry to cut rates, market sentiment is holding up. Still, with fewer rate cuts in the market pipeline, the onus will return to corporate performance to do the heavy lifting again.
Investors also showed optimism in U.S.-listed Chinese stocks, speculating that China may take measures to support its markets.
OIL MARKETS
The recent session saw oil futures closing higher following the U.S. Energy Information Administration’s (EIA) announcement regarding OPEC+ production cuts. These cuts, which deepened to 2.2 million barrels per day (bpd) from January to March, are expected to result in global inventory draws throughout the year’s first quarter.
However, the EIA forecasts that global oil inventories will gradually build up again during the remainder of 2024, with an average increase of 100,000 bpd in the final three quarters. This trend is expected to continue into 2025, with an average increase of nearly 500,000 bpd for the year.
According to the same Washington WatchDog, projections indicate that U.S. oil production will plateau in 2024. Initially, domestic production is anticipated to reach 13.3 million barrels per day (bpd) in February but is expected to decline through the middle of the year. The United States is not expected to surpass its production record of 13.3 million bpd until February 2025. This forecast suggests a temporary peak in oil production followed by a subsequent decline before reaching record levels again in early 2025.
CHINA MARKETS
According to sources described as “people with knowledge of the matter” who spoke to Bloomberg (and it’s worth noting the reliability of such sources, particularly concerning signalling market trends in China), authorities, including the China Securities Regulatory Commission, were reportedly scheduled to brief top officials including President Xi” on market conditions and the latest policy initiatives” as soon as Tuesday.
Following this news, in a devoted fashion, both Mainland and Hong Kong shares experienced significant gains. Small-cap stocks, in particular, saw notable increases, with the CSI 1000 index posting its most substantial rise since 2008 and mercifully putting the brakes on a truly disconcerting selloff. The CSI 1000 index plunged more than 6% lower on Monday alone and concluded a seven-session downturn that amounted to a staggering 20% decline.
The recent actions taken by Chinese authorities, including claims of “malicious short-selling” and restrictions on trading instruments, reflect a desperate attempt to stem the alarming decline in the stock market. While intended to restore confidence and stabilize markets, these measures underscore a more profound confidence crisis in President Xi Jinping’s leadership.
Both domestic and international investors are increasingly wary of Xi’s unpredictable policies and their potential impact on the economy and financial markets. Geopolitical tensions and economic challenges only exacerbate the situation, further eroding trust in the leadership.
The fundamental issue lies in the perception that Xi’s governance is characterized by unpredictability and inconsistency. Investors fear that sudden policy shifts or geopolitical maneuvers could lead to significant losses, undermining the attractiveness of Chinese markets.
Until there is a tangible demonstration of stability and predictability in policy formulation and implementation, it is unlikely that investor confidence will fully recover, regardless of the short-term measures taken by authorities.
Addressing the credibility deficit the Chinese government faces, particularly with overseas investors and domestic consumers, is crucial for restoring confidence in the economy. While fiscal and monetary policy may be necessary to address economic challenges, providing discourse to the perception of arbitrary policy measures while demonstrating a willingness to accept responsibility for the situation can be equally important.
A clear and transparent communication strategy from Beijing, acknowledging the concerns and uncertainties faced by various stakeholders, could help rebuild trust. This could involve efforts to enhance regulatory transparency, improve corporate governance standards, and provide reassurance regarding the stability and predictability of policy decisions.
Ultimately, restoring confidence requires more than just the national team buying stocks; it necessitates a comprehensive approach that addresses underlying structural issues and improves the business environment for both domestic and foreign investors. This could include reforms promoting market-oriented policies, strengthening the rule of law, and fostering greater accountability and transparency within the government and corporate sectors.
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