The S&P 500 rebounded sharply last Friday, putting an end to a three-month-long downtrend. Since July, the index had dropped more than 10% from its recent highs. This latest news makes a year-end rally all the more likely.
The US could soon be leaving the small group of countries with a AAA credit rating. Moody's, the last ratings agency to keep the top rating on US government debt, has just indicated a potential downgrade in the short-to-medium term, mainly because of the country’s ballooning fiscal deficit. The bond market did not react to the news.
After the Securities and Exchange Commission suffered legal setbacks over its refusal to authorise bitcoin ETFs, rumours have been spreading that these investment vehicles will soon get the green light in the US. This has, of course, buoyed digital assets and especially bitcoin, which is now trading at close to USD 37,000 – an 18-month high.
The major central banks have finished raising their key rates, with one exception. The Bank of Japan (BoJ) is on a very different path from its peers, as it has not brought an end to the loose monetary policy in place for many years now. A first round of tightening is expected soon, which could halt the yen's long decline. At the same time, the US Federal Reserve, the European Central Bank, the Bank of England and even the Swiss National Bank (SNB) are all taking a break after 18 months of rate hikes. These central banks are not yet ready to start cutting rates. Fears about surging inflation over the past two years and ongoing tensions in developed countries’ labour markets have prompted them to play it safe and keep rates higher for longer than normal, unless there’s a major economic downturn. With the exception of the yen, monetary policy expectations are therefore unlikely to affect currencies in the short term. Instead, investors will look to the relative health of countries’ economies and yield spreads between currencies to gauge how currencies are likely to behave in the months ahead. The US dollar seems to be gaining ground in this climate. While European economies slow and China struggles to pick up speed, the US economy stands out for its resilience. What's more, the additional yield that the US dollar offers against European currencies has again been increasing in recent weeks. This should – at least briefly – halt the downtrend that the dollar has been on since autumn 2022. Looking further out, however, the greenback will continue to be weighed down by factors such as the US’ structural trade deficits and the steady de-dollarisation of non-aligned countries’ currency reserves. But the dollar should fare well against the Swiss franc over the coming months, as Switzerland’s currency is likely to have to manage without the SNB's support. With inflation already back on target and the Swiss economy being held back by its close ties with Germany, whose economy is struggling, Thomas Jordan and his team no longer have any reason to maintain a policy aimed at strengthening the franc.
In China, the manufacturing and services PMIs lost ground in October compared with September. This is another sign that more policy measures are needed to keep growth on track, given the country’s sluggish economic recovery. And the Chinese government seems determined to do more. At the end of October, it announced that it would increase the fiscal deficit by RMB 1 trillion (about USD 137 billion), from 3.0% to 3.8% of GDP, in 2023– a clear signal of a change in fiscal policy. And just before that, the authorities raised the limit on the issuance of government bonds in order to support investment in infrastructure. This shows that, although the objective of GDP growth of around 5% will almost certainly be met in 2023, Beijing wants to reduce the risk of a further slowdown next year. It also shows that the central government is aware of the fiscal difficulties faced by local governments as a result of the slowdown in the property sector, and that it’s ready to expand its balance sheet in order to shore up growth. This approach, which China does not often use to fund its spending, has not yet managed to restore investors’ confidence, but it’s hoped that the meeting between Presidents Biden and Xi at the Apec conference in San Francisco this week will provide another boost. The meeting, which will be the Chinese president’s first in the US since 2017, is unlikely to truly temper the rivalry between the two economic superpowers. But market expectations are currently so low that the slightest sign that tensions have eased could be enough to lift the extremely bearish sentiment on the Chinese market.