Market update – 18th May 2022.

We’ve had some detail from China this week on plans in place to loosen the lockdowns in Shanghai:  shops will begin to open this week, further restrictions will ease towards the end of the week, public transport will start back up and further normality will return from 1st June.

Following this, on Tuesday, Shanghai reached the gold standard zero-Covid status by hitting the target of three consecutive days without a new COVID-19 case (outside of quarantine zones).

After many in the city spent weeks confined to their homes, people will now gradually be allowed out, with reports of some joggers and dog walkers seen on the streets, and a fisherman enjoying the offerings of the Shanghai river.

Whilst there have been fresh outbreaks of COVID-19 in China, recent policy moves and announcement suggest that China are easing their “zero-Covid” policy – with government pumping money into the markets, trillions in reserves and the will to use them, the easing of lockdowns is likely to be one of the catalysts needed to realise pent up demand and pent up valuations in China. Markets in Asia bounced strongly earlier in the week.

The Bank of England (“BoE”) hit headlines this week, as Andrew Bailey – the Governor of the central bank – spoke in front of the treasury select committee. He reaffirmed our view that there is little that the BoE can do to stem short-term inflation. As we have said previously, this type of inflation cannot be controlled by solely increasing interest rates.

When queried as to why the central bank’s previous inflation forecasts had been inaccurate, Bailey explained that central banks cannot predict wars. The bank forecasts that, alongside supply shocks, Russia’s invasion of Ukraine will contribute to 80% of the inflation over and above their 2% target. With inflation forecast  to peak in the fourth quarter this year at over 10% (the figure hit 9% this morning and April’s energy price cap increase was factored in), before falling back down towards the 2% target. This reaffirms our thoughts; inflation will trend downwards as supply chains re-disperse themselves and with Bailey largely attributing much of the inflationary pressures to the war in Ukraine, central banks will not be as aggressive in monetary policy tightening as perhaps the market is pricing in.

Onto upcoming data, later today we have inflation figures from the Eurozone and UK, with Japan’s released on Friday.

Hannah Owen, Portfolio Specialist.  

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