**: China Macroeconomic Forum (CMF), originally published in China Finance and Economics News
Wang Jinbin is the executive deputy secretary of the Party Committee of the School of Economics, Renmin University of Chinese, a researcher at the National Academy of Development and Strategy, and a key member of the China Macroeconomic Forum (CMF).
Looking back at the performance of the international financial market in 2023, it can be summarized as resilience and differentiation. In 2023, the international financial market has spent a thrilling year in the environment of intensifying inflation control and geopolitical conflicts in the United States and Europe. High interest rates and tightening liquidity led to the bankruptcy and closure of signature banks such as Silicon Valley Bank last year, and there was no systemic financial crisis, and the international financial market showed strong resilienceIn the environment of high interest rates, stocks rise and bonds fall, and there are large differences in different markets and different financial products, and the differentiation is obvious, which fully reflects the differences in investors' opinions in the international financial market.
International financial markets are under pressure from high interest rates and tightening liquidity
Since 2023, the world's major developed economies have continued to tighten and control inflation, and the international financial market is in a high interest rate environment. Currently, the Fed's policy rate is 533%, the highest interest rate in 22 years;The ECB's policy rate is 450%, the highest interest rate since the ECB's establishment. The U.S. dollar and the euro account for nearly 80% of the world's foreign exchange reserves and more than 70% of the world's ** settlements, and are also the main global cross-border financing currencies. Compared with 2022, the Fed has raised interest rates 4 times since 2023, and the policy interest rate has increased by 100 bpsThe European Central Bank raised interest rates six times, raising the policy rate by 200 bps. In addition, the Bank of the United Kingdom and the Bank of Canada have also raised interest rates several times, and the current policy rate is as high as 525% and 500%。
Looking at the balance sheets of the US and European central banks, compared to the end of 2022, the Fed and the European Central Bank continue to shrink their balance sheets to tighten liquidity. As of December 7, 2023, the Fed has reduced its balance sheet by more than $1 trillion that year. From the perspective of broad money M2, from the end of 2022 to October 2023, US M2 has been negative for 11 consecutive months. The size of the Fed's reverse repo has increased from 2$2 trillion fell to $0 on Dec. 11$83 trillion, liquidity and financial conditions in the U.S. financial market continue to tighten. As of December 1, 2023, the ECB has reduced its balance sheet by 095 trillion euros. Eurozone M2 continued to grow negatively from May 2023 and fell by 2. year-on-year in October2%。Liquidity and financial conditions in the Eurozone market are also tightening.
The international financial market is facing an economic environment with slowing growth and declining inflation
Global economic growth slowed last year, but significantly exceeded market expectations at the beginning of the year. The International Monetary Fund (IMF) will grow by 3 in 20230%, compared to 3The growth rate of 5% has slowed down;The economic growth rate of advanced economies was 15%, compared to 26% slowed down significantly;Growth in emerging market and developing economies was 40%, compared to 41% is a slight decrease. The latest edition of the Economic Outlook released by the Organisation for Economic Co-operation and Development (OECD) ** Global economic growth rate in 2023 is 29%, the average economic growth rate of OECD member countries is 17%, and the average economic growth rate of non-OECD member countries is 40%。Asian economies, represented by China, continue to be an important driving force for world economic growth, with the IMF and OECD predicting that China's economic growth rate will be 5.5 in 20234% and 52%。Overall, global economic growth in 2023 will slow down from 2022, but maintain a moderate growth rate. The OECD expects the overall price level in its member countries to increase from 95% to 7 in 20230%。The IMF expects global consumers** to grow from 8.2 percent in 20227% down to 7. in 20239 percent, of which advanced economies grew from 73% down to 46%；Emerging market and developing economies grew from 98% down to 85%。The global high price situation has eased in 2023, but inflation remains at a high level.
From the perspective of the United States and Europe, the IMF and the OECD predict that the US economic growth rate in 2023 will be 21% and 24%。The Federal Reserve proposed in the Economic Summary, the U.S. economy will grow by 2 in 20231%。The economic growth rate of the euro area will slow down significantly in 2023, and the economic growth rate of the euro area in 2023 will be 07% and 06%, ECB in September**, Eurozone economic growth in 2023 09%。Under the effect of aggressive tightening monetary policy, the inflation level in the United States and Europe will decline significantly in 2023. In October 2023, the U.S. Consumer Price Index (CPI) and Private Consumption Expenditures (PCE** Index** were 32% and 30%, core CPI and core PCE year-on-year **40% and 35%。In November 2023, the Eurozone inflation rate (HICP) fell to 24%, and the core inflation rate is **4 year-on-year2%。Compared with the peak of this round of inflation, inflation in the United States and Europe has cooled significantly, but the core inflation rate is still at a relatively high level. There are three main reasons for the significant decline in inflation in the United States and Europe: First, the tightening monetary policy has reduced the aggregate demand of the economy. Second, the energy and food shocks have subsided. Since 2023, there has been a significant decline in energy and food**. Third, the global first-class chain pressure has disappeared. The New York Fed's Global **Chain Stress Index has returned to its pre-pandemic normal level since 2023.
Risk appetite supports the differentiation of market risk assets**, stocks and bonds
In 2023, the risk of recession has weakened, thanks to the resilience of the labor market and the rapid decline in prices, and the economic situation of advanced economies such as the United States and Europe has been better than expected. In November 2023, the U.S. unemployment rate increased from 39% down to 37%。In October 2023, the unemployment rate in the Eurozone was 65%, the lowest unemployment rate since the establishment of the eurozone. The resilience of the labor market has reduced the risk of recession on the one hand, and on the other hand, the core inflation rate in the United States and Europe has fallen relatively slowly.
The tightening cycle has brought about a tightening of liquidity, but due to the aggressive and loose monetary policies adopted by the United States and Europe in the early stage, a large amount of liquidity has been injected into the market, compared with the end of February 2020 before the epidemic, as of the beginning of December 2023, the Fed's total assets have expanded by more than 80%, and the European Central Bank's total assets have expanded by nearly 50%. At the same time, the flow of international capital to the US and European markets during the interest rate hike cycle has also led to the transfer of international liquidity and increased the liquidity of the US and European markets. From the perspective of the US market, the Fed's current reverse repo scale is still more than $800 billion. Therefore, compared with before the epidemic, the liquidity of the US and European markets is still relatively abundant.
The relative abundance of liquidity and the decline in recession risk have led to periodic fluctuations in the risk appetite of investors in the international financial market in 2023, but the overall upward trend has been maintained, which has become a key factor supporting the United States and Europe. Since 2023, the risk premium in the US financial market has declined. According to data from the Federal Reserve's St. Louis branch, the risk premium (yield spread) between Moody's AAA-rated bonds and 10-year Treasury yields fell from 90 bps at the start of 2023 to 68 bps on Dec. 8, but the risk premium fluctuated significantly throughout the year, peaking at nearly 120 bps. The risk premium between Moody's BAA-rated bonds and 10-year Treasury yields fell from 203 bps to 161 bps over the same period. The ICE AAA-rated company index option-adjusted spread also fell from 60 bps to 37 bps over the same period.
The rise in risk appetite has boosted the US, Europe and the world, and the global market has generally shown a bullish atmosphere. According to Wind's data, as of December 12, 2023, the Dow Jones, Nasdaq, and S&P 500 are up for the year, respectively. 9% and 204%, a large increase. There are also varying degrees of generality in Europe, with the UK's FTSE 100, France's CAC 40, Germany's DAX, Italy's FTSE MIB and Eurozone's STOXX50 respectively. 9% and 200%。Asia's ** gains and losses have diverged, with the Nikkei 225, South Korea's Kospi and India's SENSEX30 each **. 4% and 145%；China's performance in 2023 is poor, and the Shanghai Composite Index is down 28%, SZSE Component Index **126%, the Hang Seng Index ** 172%；Thailand's SET, FTSE Singapore Straits and FTSE Malaysia Composite also declined, respectively. 7% and 222%。Overall, there has been a disconnect between the world's different** performance and its economic growth rate in 2023.
In terms of valuation, as of December 11, 2023, the Dow Jones, Nasdaq, and S&P 500 are trading at price-to-earnings (TTM) ratios of 25., respectively23 times, 4122 times and 2422 times, respectively, up from the end of 2022. 3% and 219%；The dividend yields of the Dow Jones, NASDAQ, and S&P 500 are respectively. 75% and 145%, respectively, down from the end of 2022. 0% and 152%。It can be seen that the rising risk appetite of investors in the U.S. market is the key factor supporting U.S. stocks**.
The rise in risk appetite has stimulated investors to hold equity-like risk assets, and the bond market has seen a significant increase. In mid-March 2023, the closure of Silicon Valley Bank and Signature Bank in the United States was directly related to the bond market, and the closure of Silicon Valley Bank became the largest bank closure in the United States since September 2008. The Fed's continued interest rate hikes have led to a large floating loss in bank bond assets**, and bank liquidity has deteriorated sharply. According to the calculation data of the Federal Reserve Dallas Central Bank, as of October 2023, the size of U.S. tradable Treasury bonds is close to 26 trillion US dollars, and the book floating loss is as high as 2$64 trillion, a record high;The book loss ratio is as high as 101%, the second highest in history.
In response to the risk of illiquidity caused by the valuation of banking assets, on March 12, 2023, the Federal Reserve urgently created a new Bank Term Financing Program (BTFP) to provide loans of up to 1 year to banks, savings associations, credit unions, and other qualified depository institutions that use their holdings of U.S. Treasury bonds, agency debt and mortgage backing**, and other eligible assets as collateral to obtain BTFP loans. When the eurozone raised interest rates in July 2022, the eurozone launched anti-fragmentation financial instruments (TPI) to deal with the disorderly market situation that may occur due to the transmission of monetary policy, reduce the impact of the sharp widening of interest rate spreads due to interest rate hikes on debt-heavy member countries, and avoid another European debt crisis.
The global foreign exchange market is generally stable and differentiated in large fluctuations
In 2023, the U.S. dollar index will rise very little, but it will basically remain at a high level of more than 100, and the global foreign exchange market will have a risk of large fluctuations. For example, in July, the euro fell to 1 1 against the dollar, which was the first time since December 2002 that the euro was parity with the dollarIn August, the renminbi fell below 7 against the US dollar3 passes;In October, the yen fell below the 150 mark against the dollar for the first time in 32 years.
The foreign exchange market will be volatile in 2023, but the overall performance will be relatively stable. The exchange rates of the world's major currencies against the US dollar have risen and fallen, and the exchange rates have clearly diverged. As of December 12, 2023, the euro has lost 0 against the US dollar**9%, the yen depreciated significantly against the dollar, depreciating by 108%, the British pound appreciated by almost 4% against the US dollar, and the Canadian dollar depreciated by only 01%, the Swiss franc has a relatively strong performance in 2023, appreciating by 53%。In terms of emerging market currencies, the renminbi depreciated by 3 percent against the U.S. dollar2%, the Australian dollar depreciated against the US dollar by 33%, and the New Zealand dollar depreciated by about 3% against the dollar. The prudential supervision of the foreign exchange market and the targeted policy of increasing US dollar liquidity have ensured to a certain extent the overall stability of the foreign exchange market of the world's major currencies in 2023. In addition, under the effect of the expected decline in world economic growth in 2023, commodities in the global financial market have generally appeared to varying degrees. As of December 12, 2023, according to Wind data, ICE cloth oil and West Texas Light Intermediate Base (WTI)** in the United States fell by more than 10% that yearAccording to the U.S. Energy Information Administration (EIA), as of December 5, 2023, natural gas** fell by about 40% that year, and energy** saw a large decline. Chicago Board of Trade (CBOT) soybeans, wheat and corn fell respectively. 4% and 286%。International copper prices were basically stable, and the rebar price of the Shanghai ** Exchange (SHFE) fell by 11%, London Metal Exchange (LME) aluminum price **105%, Guangzhou ** Exchange (GFEX) Industrial Silicon ** fell by 230%。Iron ore ** will show a relatively large increase in 2023, and Dalian Commodity Exchange (DCE) iron ore *** will rise by 123%。It is worth mentioning that in 2023, the international market will see a large increase, with London Gold and the New York Mercantile Exchange (COMEX) each increasing by nearly 90% and 94%。Gold prices** are related to the large-scale increase of holdings by some central banks around the world in 2023**, and the accelerated reshaping of the geopolitical landscape has led central banks in some economies to adjust the structure of reserve assets and increase their holdings**, while investors with low risk appetite also avoid uncertainty by holding**. Some financial innovations, such as Bitcoin, have seen more than 140% irrationality due to various factors such as market investors' expectations that the Federal Reserve will no longer raise interest rates, the imminent approval of Bitcoin on US exchanges, and the upcoming Bitcoin halving.
As of December 12, 2023, the International Fear Index (VIX) has decreased by about 43% that year, and the uncertain events faced by the international financial market have decreased: the epidemic is no longer a public health emergency of international concern;The impact of the Russia-Ukraine geopolitical conflict on the international financial market has also gradually been adapted. However, unexpectedly, a new round of Palestinian-Israeli conflict broke out on October 7, and the conflict has not yet been properly resolved, which brings uncertainty to the future deep evolution of the global geopolitical landscape and economic relations. At the same time, the tightening of monetary policy has led to continued pressure on global financial markets, and the risk of market turmoil has not been eliminated, which is a period of risk outbreak during the "last mile" of Fed tightening and the period when interest rates remain high. Rapid shifts in monetary policy cycles, continued geopolitical turmoil, and unoptimistic expectations of major international institutions for the world economy will continue to challenge global financial regulation and the risk management capabilities of market financial institutions, which will not disappear in 2024.