The Beijing Bounce
Entering the second half of the month, investors have much to digest, and at least temporarily, celebrate. Yesterday (March 16th), statements from the Fed and from the Chinese government heartened markets around the globe, dramatically cutting losses in growth stocks and emerging markets for the month. The NASDAQ had recently breached a 20% drawdown that began toward the end of last year, marking bear territory, and both the Hang Seng and the Shanghai Shenzhen CSI 300 were even deeper in the red, reaching drawdowns of 41% and 31% respectively, before getting relief from Beijing.
As reported by Xinhua, China’s state news agency, Chinese officials have pledged to work with American regulators to ensure Chinese companies comply with accounting standards required to remain listed on U.S. exchanges. They also expressed that the heighted regulatory scrutiny that had weighed on Chinese tech companies would be relaxed. And while China is in the midst of additional lockdowns related to COVID-19, which could hamper growth in the short run, the world’s second-largest economy is increasing stimulus at a time when the U.S. and other countries are tightening. The result of all this welcome news, a 16.7% bounce for the Hang Seng, and a more modest, but respectable 6.3% advance for the Shanghai Shenzhen CSI 300 (additionally, the MSCI China Index rose by 14.5% yesterday).
Turning back to the other attention grabber yesterday, the Fed increased their inflation expectation for the year to 4.3%, raised the range for the Fed Funds rate to 0.25 to 0.50%, and made plans for six more increases this year, with additional hikes on tap for next year expected to push the target rate to 2.75%. While more hawkish than expected, it appeared that as market participants digested the news, the level of certainty provided around the path forward, along with Powell’s comments on the overall strength of the economy, were welcomed. Because of the expected path of rate hikes, the yield curve, which had already flattened considerably along the 2- to 30-year portion of the curve, is now expected to be almost completely flat 1-year forward.
Through the 16th, commodities are again the big winner (and considered the most crowded trade, according to the most recent BofA Global Fund Manager survey), with the Bloomberg Commodity Index up 5.4%, followed by REITs (+2.3%), and small value stocks (+0.8%). All major fixed income indices are in the red with long-term Treasuries down 4.9%, investment grade corporate bonds off by 3.2%, and high yield bonds losing 2.2% month-to-date.
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| ASSET CLASS | INDEX | INDEX DESCRIPTION |
| U.S. Small Cap Value | Russell 2000 Value | Measures the performance of the small-cap value segment of the US equity universe. |
| Hang Seng | Hang Seng | An index of share prices based on an average of 33 stocks quoted on the Hong Kong Stock Exchange. |
| Shanghai Shenzen | Shanghai Shenzen CSI 300 | Capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. |
| Chinese Equity | MSCI China | Captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips. |
| Commodities | Bloomberg Commodity | Captures large and mid cap representation across 27 Emerging Markets (EM) countries. |
| REITS | FTSE NAREIT Equity REIT | A free-float adjusted, market capitalization-weighted index of U.S. equity REITs. |
| Investment Grade Corporates | Bloomberg Barclays U.S. Corporate OAS | Represents the Option-Adjusted Spread (OAS) of the Bloomberg Barclays U.S. Corporate Index, which measures the investment grade, fixed-rate, taxable corporate bond market. |
| High Yield Debt | Bloomberg US Corporate High Yield | Measures the USD-denominated, high yield, fixed-rate corporate bond market. |
| Long-Term Treasuries | Bloomberg US Treasury 20+ Year | Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with 20+ years to maturity. |
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