Dow tumbles 700 points + UBS asks "can this China rally run further?"

MARKETS WRAP

MAJOR HEADLINES

• Dow down 700+ points but off lows in the last hour

• Bank of England, ECB follow the Fed on interest rates
  

• ECB raises interest rates by 50 basis points and signals further hikes

• BoE also raises by 50 bps, rate is now 3.5% - a 14-year high after nine successive increases
  

• SNB hikes rates by 50bp to counter further spread of inflation
  
• Norges Bank hikes rate by 25bp and says will likely hike again
• Bond markets still harbor doubts about Fed's intent to hike and its higher-for-longer messaging
• Global investors fly blind into China's chaotic post-Covid transition, lacking proper data to track rising infections
• China activity data broadly weaker than expected on Covid effects
• Japan trade mostly in line, volumes weak
• New Zealand GDP growth much higher expected
• Australian jobs data shows a very tight labor market
• China boosts medium-term liquidity
• Factories in China try to keep production running amid surge in Covid cases 

THE CALENDAR

Tonight we get PMI data from a host of countries, namely France, Germany, Great Britain and the US. PMI data is pretty important, measuring the direction of economic trends in services and manufacturing. Weak reads will point to a slowing global economy and feed into interest rate policy. 

On that front, it seems markets are still taking their lumps after the Fed decision and hawkish tone earlier in the week. Whilst the Fed’s higher-than-expected 2023 median rate projection of 5.1% and need to keep rates up for longer was initially met with scepticism (and a market rally), since then investors appear to have come to the realisation that the Fed might actually have to do what it says, just at the time when weak economic data is showing that the US economy could fall into recession next year - hence last night's flight to safety and 900+ point selloff on the Dow. 

The Fed’s main policy rate target currently sits between 4.25% and 4.5%, up from almost zero at the start of this year.

THE CHART(S)

You will forgive me, but the charts below are also connected to the recent Fed decision and subsequent tumble in markets overnight - it's the only thing that matters right now. They come from Ophir Asset Management, which has done a great job of pointing out the market's shifting concerns - i.e. from inflation to growth. 

"Despite softer than expected inflation data coming in recently, the Fed substantially raised its projections for its key policy interest rate from its September forecasts (top chart). It’s now expected to end 2023 at 5.1%, +0.5% higher than expected in September. Despite that, the Fed still sees a soft landing for 2023, with its median real GDP growth forecast of +0.5%".

The market is not buying it, however. Not by a long shot. Most economists put the chance of a 2023 US recession at more than 50%. The silver lining? Most economists are pretty ordinary when it comes to predicting recessions the year before they occur, with less than 5% getting it right (bottom chart).

THE TECHNICALS

I wrote last week about the importance of the 7140 level - the swing high from August. At the time I said, "Ideally, the bulls will defend this level if and when tested. If they don't, we would find ourselves back in the muck that bound the market from January-June, and likely be in for another long, sideways grind".

Well, so far the bulls have done their job and defended the 7140 level with some vigour - although after last night's 900-point wipeout on the Dow, I imagine it will come under serious attack today from the bears. Today could be pivotal and watching the tape will make for very interesting reading. 

• UBS notes that stocks with China-linked revenues rallied hard through November, as the Chinese government started to ease lockdowns
• UBS notes 35 ASX-listed 'China plays' make up almost one-third of the weighing of the ASX200
• They also note that ASX 'China plays' are still at an 18% PE valuation discount to pre-COVID valuations, whilst non-resource 'China play' stocks are still down heavily from pre-COVID prices
• And finally, despite a bumpy road, China is still the #1 customer for Australian export earnings

So, which two stocks did the boffins in the UBS team highlight? Qantas (ASX: QAN) and Seek Limited (ASX: SEK), noting that they are "particularly drawn to the attractive relative value and price which both offer". 

Today was the last instalment of Charts and Caffeine for the year. From Chris Conway and Hans Lee, we sincerely hope that you have enjoyed the coverage this year and we look forward to coming back bigger and better in 2023. Here's wishing you a safe and happy holiday season. 

Chris Conway wrote today's report.

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