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USA and China: all eyes are on November

Luxembourg, 13 June 2022 – Currently, the markets find themselves in a transitional phase. Crises and weak growth on the one hand, full order books and pent-up demand on the other, are causing volatility. Both the US and China will do their utmost, however, to turn the mood positive by autumn. “Midterm elections will be held in the US in November, and China will be hosting the Communist Party Congress”, said Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “Calm in the markets and positive news in the run-up to these events will be important in both countries.”

In the coming months and even into 2023, global economic growth is set to lose momentum, with high inflation rates and the resulting more restrictive central bank policies as the main economic headwinds. These negative elements are well known to the markets, however, and have already been priced in.

On the other hand, order backlogs in Europe continue to be at record highs and are waiting to be processed. “This should have a supportive effect, especially as companies and private individuals are sitting on huge cash reserves”, Gerlinger pointed out. In the coming months, some of this money will be invested or flow into consumption. “This will counteract a recessionary mood, since higher energy spending is also significantly lower than existing savings or the new savings formed in times of corona”, Gerlinger added.

Expiring lockdowns in China are leading to further easing, particularly on the supply chain side, which should also have a supportive effect on the global economy. “The recession that is widely expected on the capital markets is not reflected in current economic indicators”, Gerlinger said. “But central bank policy will certainly not miss its effect over a 12-month view.” For this reason, momentum is expected to slow, which could prompt the Fed to stop tightening interest rates in late autumn. After all, central bankers are keen to see a soft landing for the US economy. At the current time, the probability of the global economy sliding into recession is estimated at a maximum of 30 per cent.

In particular, this is also due to the fact that two very strong players in the global economy are not at all interested in a recession, which would be accompanied by a bear market. In the US, the mid-term elections will be held in November 2022 with the Democrats’ narrow majority at stake. Bleak economic figures are traditionally blamed on the party of the incumbent President rather than on the opposition. And in China, the Communist Party Congress is a major event waiting to be celebrated later this year. Bad economic data might dampen the mood, which is not what party leadership wants.

Consequently, both economic powers will likely do their utmost to lift the economic mood. “Given that the indicators are not yet pointing to a recession, it will only take a minor stimulus to make the pendulum swing”, Gerlinger emphasised. “Even slightly more moderate comments by the Fed on monetary policy could turn the sentiment around.” And a more expansionary stance or somewhat more ambitious growth targets in China would also be helpful.

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