Unpacking the latest announcements from hawkish central banks
On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Research Analyst Laura Bardewyck discussed recent stock-market volatility, the latest decisions from global central banks and China’s economic reopening.
The outlook for markets as volatility returns
Bardewyck opened the conversation by asking Cousley what investors should be focusing on, given the latest flare-up in market volatility. Cousley said that examining markets through Russell Investments’ investing framework of cycle, valuation and sentiment offers some key takeaways for investors.
Starting with value, he noted that equity markets are less expensive right now, due to the year-to-date selloff in stocks. However, Cousley added that he doesn’t see any signs that markets are outright cheap at the moment. Meanwhile, business cycle concerns have increased significantly due to high energy prices, persistently elevated inflation and aggressive central banks—and worries over whether the economy will be able to withstand these pressures over the next 12 months, he said.
The final component of the investing framework, sentiment, has been the swing factor recently, Cousley said, noting that Russell Investments’ proprietary indicator of equity-market sentiment shows signs of panic. “Historically, these signs of panic have presented really good buying opportunities,” he explained.
All told, over the last two months, Cousley said he’s generally observed that markets are oversold, but not to an extreme level. “Given our cycle concerns, we believe there should be quite a few hurdles to jump through to add extra equity risk to portfolios. For now, at Russell Investments, we’re quite neutral and are sticking to our long-term strategic asset allocation,” he stated.
RBA surprises with steep rate hike, while ECB signals 25-bps increase in July
Turning to the latest actions by global central banks, Cousley said the European Central Bank (ECB) announced at its June 9 meeting plans to hike rates by 25 basis points (bps) in July. The central bank also stated that it will halt its asset-purchasing program at the end of June, he added. Perhaps most significantly, ECB President Christine Lagarde indicated in a follow-up press conference that the central bank could increase rates by more than 25 bps at its September meeting if inflation is still running above the target rate of 2%, Cousley said.
“The latest rhetoric shows that the ECB has really shifted to a much more hawkish stance, bringing it into alignment with most other central banks,” he remarked. Markets are currently expecting the ECB’s cash rate to rise to between 1.5% and 2% in the next 12 months, which would be a stark shift from the current rate of -0.5%, Cousley added.
The Reserve Bank of Australia (RBA) also held its policy meeting the week of June 6, he said, noting that the bank surprised markets with a 50-bps rate hike—the steepest increase in 22 years. “Markets had been torn between a hike of either 25 bps or 40 bps,” Cousley explained, adding that the RBA’s cash rate now stands at 0.85%. Current market pricing projects that the key rate will rise to 3% by the end of the year, Cousley added.
“I think that’s probably a bit too aggressive—and I’d expect the RBA to settle at a little lower level, given how much the cash rate influences mortgage rates,” he said, explaining that most mortgages in Australia are variable or short-term fixed rates.
Last but not least, Cousley said the Reserve Bank of India (RBI) also surprised markets by announcing a steeper-than-expected rate rise on June 8, lifting its benchmark interest rate by 50 bps. He noted that the RBI has lagged most of its emerging-market central-bank counterparts in policy tightening this year, and probably still has some more catching up to do.
China reopens. Is more government stimulus on the way?
Cousley and Bardewyck wrapped up the segment with a look at China’s economic reopening and the path forward for growth, now that most COVID-19 lockdowns in major Chinese cities have been lifted.
“In the wake of the lockdowns, China’s 5.5% GDP (gross domestic product) growth target for the year is clearly too aggressive—and the nation will likely still have challenges around managing COVID-19, as China has a very high amount of unvaccinated elderly individuals,” Cousley remarked. However, more signs are emerging from the Chinese government that it wants to stimulate the economy, he said. Recent examples include tax cuts to businesses in Shanghai as well as infrastructure spending, Cousley noted.
There are also some signs that government officials are trying to alleviate the pains in China’s housing market, he said. These including slashing interest rates and making it easier for more individuals to take out a mortgage, Cousley explained.
“Ultimately, while China still looks to be in a tough situation in the near-term, I do think that the stimulus measures could start supporting the economy more later in the third quarter and into the fourth quarter of this year,” he concluded.