The sustainable investor for a changing world

Curves road in fields
Front of mind | Article - 4 Min

Weekly Market Update – Divergence is the theme

Divergence is a key theme in global markets now, with the manufacturing side of many economies much weaker than the services sector, although services activity has also been cooling recently. Inflation data is also diverging – across different regions: price pressures have remained sticky in Europe and the UK; those in the US and many emerging economies have eased.

Where inflation has been slackening, central bankers have begun mulling over whether to stop raising interest rates or already start easing monetary policy (as has been the case in some emerging markets). This has prompted our multi-asset investment teams to overweight emerging market bonds, alongside our overweight position in developed market bond duration.

Markets and fundamentals

Wall Street was rocked last week when Apple, the largest listed tech company, lost some USD 200 billion in market capitalisation in just two days after China was reported to have banned the use of Apple’s phones in government offices and state companies. While a shock development, analysts estimate the hit to sales would be only about 1% in the coming year.

China later clarified it hadn’t issued any ban of iPhones or other foreign phone brands and highlighted media reports on security incidents and the importance of cybersecurity and the prevention of data theft. The comments appeared to remove market concern over what would have been an unprecedented blockade as part of Beijing’s multi-year efforts to root out foreign technology use in sensitive environments.

As this ‘China dust’ settles, we expect financial markets to return their focus to the fundamentals – US Federal Reserve (Fed) policy expectations and interest rate paths, energy prices, China’s growth outlook, the risk of stagflation – and how such a mix of factors may affect global market dynamics.

Expectations that the US economy is heading for a soft landing are gradually becoming a base case for market observers as the effects of monetary tightening are being felt in other developed markets.

The recent mix of good and bad indicators leaves us with no clear signals concerning the timing of a monetary policy shift by the Fed and the other major central banks. While they appear comfortable with their current policy stance, the overwhelming indication is still that the fight against inflation is not yet over.

The Fed appears torn between tightening policy further or pausing as its focus shifts to the decline in US household savings, which have shrunk much faster than in other developed markets. Until now, excess savings have helped support US consumer spending and economic growth; their decline could be a warning that the economy will lose steam.

The eurozone economy is also showing signs of slowing as monetary tightening starts to bite. Growth indicators – notably the August purchasing managers’ index (PMI) and Germany’s weakening industrial activity – are signalling stagnation. The EU Commission has cut its forecast of eurozone GDP growth to 0.8% YoY this year from 1.1% earlier; it also sees Germany’s GDP contracting by 0.4% this year.

Much will depend on how labour markets fare. Unemployment rates are yet to pick up meaningfully to slow inflation as the number of jobs has still been growing (although more slowly).

Wage growth has thus remained high in Europe, and notably so in the UK, contributing to the stickiness in services inflation. In the US, nominal wages are still rising at more than 4.0% a year, which remains inconsistent with the Fed’s 2.0% core inflation target.

More easing by China

Meanwhile, China’s growth outlook (especially that of its ailing property market) remains a global concern, though there now is evidence of broader easing measures from Beijing. August credit data beat market expectations, lifting aggregate credit growth to 9.3% year-on-year from 8.9% in July and the credit impulse by 80bp to -2.2% (Exhibit 3), driven by greater government bond issuance.

Beijing plans to issue RMB 1.5 trillion of special government bonds to swap for local government financial vehicle debts of 12 provinces in the coming months. Although this amount is small compared to total outstanding LGFV debt (estimated at RMB 78 trillion to RMB 96 trillion, or 64-79% of GDP, in 2022), it signals support for local governments and by extension the property market. The People’s Bank of China is considering setting up a special purpose vehicle to provide liquidity for LGFVs to pay off debt and arrears.

These moves should help ease market concerns over systemic risk.

Beijing has also stepped up its efforts to reduce the property market’s difficulties. All four tier-1 cities have announced a relaxation of property controls. The Shanghai and Shenzhen Stock Exchanges recently signed a memorandum on supporting financing to private property developers.

The most significant move has been the joint effort by the monetary and regulatory authorities to loosen down-payment requirements for home purchases nationwide, lower the mortgage rate floor and reduce existing mortgage rates for the first time since the Global Financial Crisis.

These measures are focused on the demand-side of the property market. We believe Beijing still needs to resolve developers’ financing problems by further monetary easing.

No Chinese deflation

Investor concern over China falling into deflation was dispelled by the August consumer price index. CPI inflation turned positive after falling below 0% in July.

This underscores our recent argument that prolonged deflation would be unlikely in China because the pre-conditions for deflation are absent.

Money supply is still expanding, though the growth rate has been slowing. There are no worrying signs of demand destruction outside of exports. Income growth is slowing, but not contracting. Consumer demand is recovering and overall labour market conditions are not dire. Consumers have been drawing down saving to fund spending, indicating there has been no permanent loss of confidence.

Provided Beijing continues to act to shore up economic activity and business and consumer confidence, we believe the current pessimism will not become entrenched and hit growth more heavily.


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Related insights

14:07 MIN
Market weekly – Quality is now key
15:39 MIN
Market weekly – Some calm after the storm

In the U.S., this material is for Institutional use only – not for public distribution. This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

These documents and video clips may also include information obtained from affiliated investment management companies within BNP Paribas Asset Management, the brand name of the BNP Paribas group’s asset management services. The documents and video clips are produced for informational purposes only and do not constitute: 1. an offer to buy nor a solicitation to sell, nor shall they form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Any opinions included in these documents and video clips constitute the judgment of the author/ presenter at the time specified and may be subject to change without notice.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BNP PARIBAS ASSET MANAGEMENT USA, Inc. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.


BNP PARIBAS ASSET MANAGEMENT USA, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. BNP PARIBAS ASSET MANAGEMENT USA, Inc. is a registered trademark of BNP Paribas or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. © 2023 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP PARIBAS ASSET MANAGEMENT is the global brand name of the BNP Paribas group’s asset management services. © 2023 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP Paribas Asset Management seeks to integrate environmental, social and governance (“ESG”) factors into all of our portfolios as a means to mitigate certain short, medium and long-term financial risks, identify better long-term investments, and encourage more responsible corporate behavior. We will never subordinate our client’s interests to unrelated objectives. Certain issuers and industries are excluded from our actively managed portfolios based upon our view of their ESG performance and risk profile. As a result, we may pass up certain opportunities when these excluded issuers or industries are in favor. Due to significant gaps in disclosure regimes around the world, we may need to rely upon voluntary disclosures by issuers, which are often not audited. We therefore may not have consistent access to complete, accurate or comparable information about the ESG performance of our holdings. Please consult the applicable offering document for more information about the specific ESG strategy employed by each investment strategy since a given strategy may not have specific ESG guidelines, and investments are not limited to securities that are ESG compatible.

To access insights from our teams worldwide visit:
Explore VIEWPOINT today