Please click Terms and conditions to read the Terms of Use of this website before proceeding. Please click the "Accept" button below to continue if you have read and agree to abide by the Terms of Use. Otherwise, please click "Decline" to leave the website.
Terms of Use
You must read the following information before proceeding. By accessing this website / application and any pages thereof, you acknowledge that you have read the following information and accept the terms and conditions set out below and agree to be bound by such terms and conditions. If you do not agree to such terms and conditions, please do not access this website / application or any pages thereof.
General
This website / application has been prepared by FIL Investment Management (Hong Kong) Limited and for informational purposes only. FIL Investment Management (Hong Kong) Limited, FIL Limited and its subsidiaries are commonly referred to as Fidelity or Fidelity International ("Fidelity"). The information on this website / application is intended for Hong Kong residents and is for reference only. None of the Fidelity products referred to on this website have been approved for sale or purchase by any authority outside Hong Kong. Persons resident in territories other than Hong Kong should consult their professional advisers as to whether they may subscribe for the products and services described in this website / application or whether they require any governmental or other consents or need to observe any formalities to enable them to do so. Certain Fidelity products sold in Asia may be established in Luxembourg. The information contained in this website / application does not constitute a distribution, an offer to buy or sell any securities or the solicitation of any offer to buy or sell any securities, engage the investment management services of Fidelity in any jurisdiction in which the distribution or offer is not authorized or would be contrary to local laws or regulations. Without limitation, the information in this website / application is not for distribution and does not constitute an offer to buy or sell any securities in the United States of America to or for the benefit of United States persons (being residents or citizens of the United States of America or partnerships or corporations organized under the laws of the United States of America). It is the responsibility of the persons who access this website / application to observe all applicable laws and regulations.
Fidelity reserves the right to grant or revoke the authority to use the Fidelity Internet sites at its absolute discretion. Whilst every reasonable precaution has been taken to ensure the accuracy, completeness, security and confidentiality of information available through the Fidelity Internet sites, Fidelity makes no warranty as to the accuracy, completeness, security and confidentiality of such information. Fidelity, its affiliates, directors, officers or employees accept no liability for any errors or omissions relating to information available through the Fidelity Internet sites. Fidelity cannot be held responsible for any consequence of any action carried out by any user authorised or unauthorised.
These Terms of Use are in addition to any other agreements between you and FIL Investment Management (Hong Kong) Limited, including any customer or account agreements, and any other agreements that govern your use of FIL Investment Management (Hong Kong) Limited’s products, services, content, tools and information available on this website / application.
We reserve the right to change the website / application and the Terms of Use at any time without notice. If you use the website / application after the amended Terms of Use have been published, you will be deemed to have agreed to the Terms of Use, as amended.
Use of website
Unless otherwise specified, information contained in this website / application does not constitute investment advice or recommendations. Users are solely responsible for determining whether any investment, security or strategy, or any other product or service is appropriate or suitable for them based on their investment objectives and personal and financial situation unless otherwise agreed by FIL Investment Management (Hong Kong) Limited. Any person considering an investment should seek independent advice on the suitability or otherwise of the particular investment. While certain tools available on the website / application may provide general investment or financial analyses based upon your personalized input, such results are for your information purposes only and you should refer to the assumptions and limitations relevant to the use of such tools as set out in this website / application. Users should consult their independent professional advisers should they have any questions. The information contained in this website / application is only accurate on the date such information is published on this website / application.
Third Party Content
This website / application includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated with any Fidelity entity ("Third Party Content"). Third Party Content is available through framed areas, through hyperlinks to third party web sites, or is simply published on the site. The Third Party Content is protected by copyright pursuant to Hong Kong laws and international treaties and is owned or licensed by the Third Party Content provider(s) credited.
Fidelity has not been involved in the preparation, adoption or editing of such third party materials and does not explicitly or implicitly endorse or approve such content. Any opinions or recommendations expressed on third party materials are solely those of the independent providers, not of Fidelity.Fidelity is not responsible for any errors or omissions relating to specific information provided by any third party.
While Fidelity makes every attempt to provide accurate and timely information to serve the needs of users, neither Fidelity nor the Third Party Content providers guarantee its accuracy, timeliness, completeness, usefulness or any other aspect of the information and are not responsible or liable for any such content, including any advertising, products, or other materials on or available from third party sites. You will access and use Third Party Content at your own risk. Third Party Content is provided for informational purposes only, and Fidelity and the Third Party Content providers shall not be liable for any loss or damage arising from your reliance upon such information.
Internet Communication
Messages sent over the Internet cannot be guaranteed to be completely secure. Fidelity will not be responsible for any damages incurred by investors as a result of any delay, loss, diversion, alteration or corruption of any message either sent to or received from Fidelity at investors’ request, over the Internet. Fidelity is not responsible in any manner for direct, indirect, special or consequential damages arising out of the use of this website / application.Communication over the Internet may be subject to interruption, transmission blackout, delayed transmission due to Internet traffic or incorrect data transmission due to the public nature of the Internet or otherwise.
Fidelity does not represent or warrant that this website / application will be available and meet investors requirements, that access will not be interrupted, that there will be no delays, failures, errors or omissions or loss of transmitted information, that no viruses or other contaminating or destructive properties will be transmitted or that no damage will occur to investors computer system. Investors have sole responsibility for adequate protection and back up of data and/or equipment and for undertaking reasonable and appropriate precautions to scan for computer viruses or other destructive properties. Fidelity makes no representations or warranties regarding the accuracy, functionality or performance of any third party software or service providers that may be used in connection with the site.
Intellectual Property Rights
Copyright, trade marks, database rights, patents and all similar rights in this site and the information contained in it are owned by Fidelity, its licensors or relevant third party content providers. Users may use the information on this site and reproduce it in hardcopy for their personal reference only. The information may not otherwise be reproduced, distributed or transmitted to any other person or incorporated in any way in to another database, document or other material. Any copy of materials which a user makes from the site must retain all copyright or other proprietary notices and disclaimers contained therein. Trade names referred to in this site are trade marks owned by or licensed to Fidelity or other content providers. Trade marks owned by Fidelity or providers of content on the site are used to act as an indication of source or origin of associated services. Nothing on this site should be considered as granting any licence or right under any trade mark of Fidelity or any third party, nor should a user attempt to use, copy adapt or attempt to register any similar trade marks to any trade marks or logos appearing on the website / application or in the Information herein.
Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.
Third party marks appearing in this website / application are the property of their respective owners and used with the permission of such owners, where necessary.
Governing Law
These Terms of Use shall be governed by the laws of Hong Kong Special Administrative Region.
Languages
In case of discrepancies between the English and Chinese language versions of these Terms of Use and content of this website / application, the English version shall prevail.
Central banks fighting yesterday’s battles as credit crunch looms
09 May 2023
Salman Ahmed, Global Head of Macro & Strategic Asset Allocation
Anna Stupnytska, Global Macro Economist
Two key decisions at the start of May saw the Fed tentatively indicate a pause, and the ECB send an unequivocal message of more to come. With so much tightening already in the system in the US and Europe, it seems only a matter of time before tighter policy transmits to the real economy in a more forceful way. There is a limit to how much divergence there can be between the two banks and this constraint may bite the ECB earlier than it expects.
Fed: Hike in May and go away?
At its May meeting, the Fed’s Open Market Committee raised its headline interest rates by another 25 basis points and indicated it would take a data dependency-driven approach going forward. The bank, however, stopped short of signalling an unequivocal peak to the cycle and Chair Powell was balanced in his communication, indicating that financial stability remains intact, and conditions have improved since March.
High and persistent inflation dynamics coupled with a super tight labour market means the wedge between financial stability and price stability continues to widen. We are seeing pressure building in the regional banks space again which is being tackled by the provision of liquidity and government-induced private sector solutions. However, the ensuing impact of credit tightening (despite the uncertainty around its timing and size) remains the key driver of the next phase of the macro cycle.
Currently, markets are pricing in sizeable cuts in official rates by the end of the year, reflecting elevated risk premia around a more forceful hard landing (Chart 1). Over the shorter term, we expect the Fed to bring that pricing towards the ‘higher for longer’ path in order to tackle inflation dynamics. But the likelihood of actual cuts happening as a cyclical recession comes through is not insignificant in our view, and may come fast if debt ceiling issues become more severe over the coming months.
Fed market pricing
Source: Bloomberg, Fidelity International, May 2023
ECB: Not pausing yet
The ECB also delivered a 25-basis-point rise, in line with market pricing, the smallest move it has made since the start of the hiking cycle in July 2022. Given some - albeit very modest - cooling in core inflation in March and the continued rapid tightening in lending conditions shown by the ECB’s latest Bank Lending Survey (BLS), this decision appears in line with a data dependent approach.
The bank’s statement had a dovish tone, noting that policy tightening so far is already feeding into financing and monetary conditions "forcefully" and that the transmission mechanism itself remains uncertain. It did not give a clear indication of the rate path from here, only stating that future decisions will make policy rates "sufficiently restrictive".
At the same time, President Lagarde sent an emphatic message at the press conference that the ECB is “not pausing” and has “more ground to cover” given inflation dynamics. Indeed, Euro area activity remains resilient, particularly in the services sector, and the labour market is strong, suggesting we may not yet have seen the peak in wage growth and inflation. The lending survey did not point to any major impact from the stress we have seen in the banking system since March, and our own modelling does not indicate dramatic tightening from here.
All this potentially sets the stage for the ECB to hike again in June and then pause, although a lot can happen before then. Markets are pricing another quarter percentage point move, with a high probability of rates staying at that peak until the end of the year.
ECB market pricing
Source: Bloomberg, Fidelity International, May 2023
Limits to the Fed-ECB policy stance divergence
We believe there are limits to the policy divergence of the two banks and that market pricing is unlikely to be borne out, for a number of reasons. Firstly, we continue to believe that the tightening delivered by the Fed and the ECB is already sufficient to cause a recession. The impact of tighter policy is more obvious in the US, largely because the Fed started its hiking cycle four months ahead of the ECB. The real economy in the Euro area is yet to face the hit but it is coming. In this respect, the ECB has less ground to cover than they believe. We continue to stress that the ECB is very likely already in policy-mistake territory that may ultimately require a rapid course correction in coming months.
Secondly, even without further acute stress in the banking system in Europe, tight credit conditions are here to stay, ultimately leading to credit contraction and recession. Renewed banking stress in the US will likely also exacerbate the tighter credit dynamics in Europe. And if the US banking stress evolves into a more systemic shock and leads the Fed down the rates path currently priced in by markets, sentiment and financial conditions are likely to see the ECB facing spillovers. This will certainly challenge President Lagarde’s belief that ECB policy is independent of the Fed.
Asset allocation views - focus on relative opportunities
A key challenge for asset allocators is how best to balance the relatively strong current macro environment against tighter policy that is starting to hit the credit channel and the real economy. We believe selectivity is important, expressing caution through an underweight to corporate debt and an overweight to government bonds but remaining neutral on equities.
We are cautious on US equities preferring higher quality areas within both US equities and credit. We prefer European small caps to US small caps and European banks to US regional banks. We believe that the China reopening story is still intact, meaning China - and broader emerging markets - could be useful diversifiers if growth in the developed world stalls or banking stresses intensify.
