Fundamental Analysis

Equities Weighed by Risk Aversion, Focus on China’s Reopening

As investors looked forward to 2023 with caution and weighed hopes for economic growth, equities closed lower on Wednesday as US Treasury yields rose. China also eased COVID-19 restrictions amid concerns about rising incidences in the country.

The benchmark 10-year Treasury yield rose for the third day in a row, reversing a decline earlier as investors weighed China’s reopening and expected a Fed rate hike.

A rise in Treasury yields boosted the dollar’s position against the yen, while the pound lost ground against the US dollar after gaining earlier.

High-tech stocks shunned growth stocks as investors shied away from riskier bets, and the Nasdaq closed up 1.35%. On Wednesday, Nasdaq stocks lost more than 36% of their value from their November record high.

A brutal year for stocks ended with a 0.92% fall in the MSCI index, the world’s broadest stock index. During the financial crisis, the global index fell by over 20% in 2008, the largest annual drop since then.

MSCI change from Oct 20 to Nov 22 (Source: Morgan Stanley)
MSCI change from Oct 20 to Nov 22 (Source: Morgan Stanley)

Chinese authorities announced Monday that quarantine requirements for Jan. 8 arrivals will be lifted. Investors were still digesting the announcement. In the last few years, Beijing has lifted restrictions on domestic healthcare in China, placing severe pressure on the healthcare system. Next month’s Lunar New Year celebrations will probably be the peak of contagion, according to JP Morgan strategists.

According to Thomas Hayes, chairman of Great Hill Capital LLC in New York, reopening the second-largest economy in the world will ultimately benefit US businesses.

Several people were surprised at the speed with which they changed positions. China has had a disaster for the past two years, so people are skeptical.

Amit Sinha, head of multiasset strategy at Voya Investment Management, said Wednesday’s share decline was caused by weak liquidity and tax losses as investors sold money-losing assets.

The risk of nibbling and selling to recover tax losses is present today, Sinha noted. “It was a down month for the markets in December. The sentiments and dynamics are already negative.”

According to Sinha, 2023 represents uncertainty about whether the Fed can control inflation without harming the economy by increasing rates.

“There’s no good reason to be on the other side. That exaggerates the price drop,” he said.