It's all about policy
Powell pivots... to more hawkish; China refutes reopening committee rumours
This picture succinctly sums up market moves over the past week. US markets were buoyed by hope (read: hopium) that the Powell pivot might come sooner as expected, with MS coming out just 4 days before the November FOMC meeting saying their indicators “all support a Fed pivot sooner rather than later”.
Then came Powell yesterday saying that the terminal interest rate may be higher than Fed officials had envisioned in September. Following that comment, Nasdaq fell 3.5% and gapped down at the open today.
In China, a tiny 2-day rally of 6.8% in the HSI was fuelled by speculation that China is creating a committee to speed up the reopening plan, targeting March 2023.
Here is the unverified, unofficial screenshot in question:
The National Health Commission then appeared today to say “We must resolutely maintain the general approach of ‘preventing imported cases and domestic resurgence’ and the overall strategy of ‘dynamic Covid Zero’”.
To me, this shows that today’s market is driven almost completely by policy, and not at all by fundamentals. Any dovish shift in Powell’s comments in upcoming meetings will likely see the start of the market recovery. Any news on China beginning its gradual reopening will also see the China market bottoming.
Given the high cash levels of funds and a possible recession next year (60% probability), the recovery will likely be gradual and long-drawn. There will be time to go get in when it happens.