International Communique No. 303 – 24th August 2021


Last week was a turbulent time in the markets, which reacted to Fed minutes and the Chinese government’s pronouncements.

The Fed has started to prep for a possible curtailment of monthly asset purchases, which are currently chugging along at USD 120 billion per month. The tapering could even start this year. The Fed is on track to meet all three of its objectives, namely the resumption of growth, the 2% inflation target and the improvement in hiring. Inflation is even above-target, while the labour market is rapidly returning to normal. What is more, some investors have become accustomed to this invisible hand supporting bond and equity markets for almost 10 years, in the form of the famous ‘Fed Put’.

The prospective of abandoning asset purchasing is likely to generate further volatility in financial markets. It is worth bearing in mind that a central bank buying up government debt is an ‘aberration’ – an unorthodox procedure that ought not to persist once the exceptional economic conditions justifying it in the first place have abated. While the withdrawal of stimulus will not be a smooth process, it is nevertheless a positive sign that the ‘patient’ (i.e. the US economy) no longer needs to be on life support.

Meanwhile China has continued its pronouncements, which seem to have replaced – in terms of market impact – the disruptive ‘Tweets’ posted by Donald Trump while he was still president. This week, China’s Communist Party mooted the idea of more strictly regulating what it sees as excessive corporate profits by encouraging beneficiaries to ‘give back’ more to society, marking a step towards a fairer distribution of wealth.

It is often stated in the literature that widening inequality can destabilise societies in the long run. Several Western economists have been sounding the alarm for years that income inequality in the West has reached levels not seen since the 1920s. In essence, the Chinese government’s concerns seem legitimate if it is noted that a core objective is to improve the living conditions of its population as a whole. However, it is not yet clear how these new policy ideas will be implemented in the real economy.

Nothing more was needed to send luxury goods stocks, many of which have significant sales exposure to China, spiralling down sharply. There will doubtless be plenty more news about this theme in the weeks to come.

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