Raphael Stevens

Foreign economists are forever urging China to increase its consumer spending. On June 18th each year, the country tends to oblige. That is the date of the “618” shopping festival, promoted by jd.com, which was founded on the same day in 1998. The company started life in a modest, four-square-metre shop in Beijing, selling vcds and dvds. But during the sars epidemic of 2003-04, when the capital’s shopping districts fell quiet, it moved online. It was hugely successful, becoming one of China’s biggest e-commerce firms—a triumph of commerce over a coronavirus.China’s retailers will hope this year’s 618 marks a similar victory. After months of lockdowns and restrictions to contain another coronavirus outbreak, China’s shoppers now have a bit more freedom to move about and an occasion to splash out. China’s vast machinery of production and distribution also appears more ready to serve them. By June 10th, almost 55% of the listed companies operating in Shanghai had announced a resumption of work, notes cicc, a bank. And over half of the couriers surveyed by Kuaidi100, a data provider, said that they have been busier in the build-up to this year’s 618 than last year’s. In Shanghai and the nearby provinces of Jiangsu and Zhejiang, power plants are now consuming about as much coal as last year, points out cicc, a sign that their local economies are plugging themselves back in. Indeed, despite all the logistical impediments they faced, China’s manufacturers, miners and utilities were able to churn out more stuff last month than they did in 2021, according to figures released on June 15th. Industrial production rose by 0.7% in May compared with a year earlier, defying fears of another decline. China’s exports also fared better than expected, growing by almost 17% in dollar terms in May, compared with a year earlier. Much of the shipping traffic that could not pass through Shanghai migrated to the port of Ningbo in Zhejiang instead. China’s proliferation of ports, which once looked like overcapacity, now looks like helpful redundancy. When a country has to shut down a vital global trade hub, it is handy to have a second one 150km to the south.The constraints on China’s ability to make things and distribute them are, then, lifting. But what remains fettered and caged is the consumer’s willingness to buy them. Consumer confidence is at a record low. Retail sales fell by almost 10% in real terms in May, compared with a year earlier, having declined by 14% the month before (see chart). Catering shrank by more than a fifth. In places like Shanghai and Beijing, people still face mandatory covid testing and “mini-lockdowns” in neighbourhoods where cases appear. That makes mingling in markets and malls a risky endeavour. Demand for housing is also strikingly subdued. Sales of new flats (measured by floor space) fell by over 30% in the year to May. The government has cut mortgage rates a little. It has also allowed local authorities to ease some regulatory curbs on property purchases. But the main restriction now seems to be poor morale. China’s forever war against covid seems to have vanquished another formidable foe: property speculation. The one exception to this gloomy consumer data is online sales, which grew by 7% last month, compared with a year ago. During this year’s 618 festival, many retailers are hoping to usher their customers into virtual-shopping spaces in the metaverse. They are dangling before them digital collectibles and non-fungible tokens, based on characters from “Journey to the West”, a classic of Chinese literature, and “Transformers”, a movie franchise. Under China’s draconian zero-covid policies, “real life” can lose much of its vivacity and spontaneity. The metaverse might seem unusually appealing. At least you don’t have to take a covid test to get in. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

In everyday parlance equity means fairness. To an investor or a stockbroker, though, it is an ownership stake. The word means both things thanks to the English Court of Chancery, which operated from around the 15th to the 19th centuries and handed out rulings based on “equity”, or fairness, rather than common law. Under common law a borrower who missed a mortgage payment would forfeit their land, but in Chancery they could reclaim it by repaying the debt. Over time, “equity” came to mean the ownership stake in property itself. Today’s legal and regulatory systems are tasked with ensuring that finance is fair. And Gary Gensler, the head of the Securities and Exchange Commission, America’s markets watchdog, is not happy. In a speech on June 8th he worried that “market segmentation and concentration” mean there is no longer a “level playing-field” in the stockmarket. It is “not clear”, he said, that the “market system is as fair and competitive as possible for investors”.A fair market is transparent, accessible and uses a reasonable method to arrange buyers and sellers—think of a public farmers’ market with clearly stated prices and an orderly queue. A decade ago this was a decent (if simplified) description of most equity trades. Three-quarters of them, by volume, were conducted on public exchanges; only a quarter were done “off-exchange”. No more. In 2021, during the “meme-stock” craze when retail bets sent GameStop shares soaring, the share of off-exchange trades swelled to a peak of 47%. Retail punters are far less likely to have their orders executed on public exchanges than institutional investors. More than 90% of retail orders are sent to a concentrated group of marketmakers that pay brokers to deliver the orders to them (a practice called payment for order flow). At first glance, this system is not obviously bad for retail investors. Brokers—Charles Schwab, say, or Robinhood—are obliged to seek “best execution” for their customers. In order to direct a retail order to a marketmaker, like Citadel Securities or Virtu, they must beat the prevailing price offered by public exchanges—the so-called “national best bid and offer” (nbbo)—a feature known as “price improvement”. That means retail traders probably get better prices than most institutions. Marketmakers are happy to pay for their business because the flows are not risky. It is easy to match retail flows against each other. By matching trades they can give a lower price than the best offer to the buyer, a higher price than the best bid to the seller, and have some left over—a slice of which they pay to the broker, and the rest of which they keep. The payments mean brokers do not need to charge customers commission.Yet there are flaws. Post-trade price improvement makes it impossible for punters to know ahead of trading which broker would ultimately give them the best execution price. As Mr Gensler put it, “price improvement without competition…is not necessarily the best price improvement.” Marketmakers and brokers might start to hang on to more of the benefits, instead of passing them on to punters. Larry Tabb of Bloomberg, a data firm, has found that American retail investors in March 2022 collected 47% of the benefit ($3.7bn on an annualised basis), while brokers were paid 13%($900m). The marketmakers themselves took some 40% ($3.1bn).Moreover, the system of price improvement relative to the nbbo only benefits customers if the nbbo is a good benchmark—a claim that is getting shakier. For a start, the nbbo is measured for orders of 100 shares or more. This was sensible in 2014, when just 15% of trades were in smaller quantities. By March 2022, though, the share had climbed to 55%. And if trading volumes continue to move off-exchange, the benchmarks will become ever less meaningful. One solution from Mr Gensler is for exchanges to hold auctions for retail stock orders, a practice typically used to fill retail orders for equity derivatives. By redirecting retail flows to exchanges, this would radically reshape American stockmarkets—to the benefit of exchanges and the detriment of marketmakers—and is therefore likely to be fiercely resisted. Hours after Mr Gensler spoke Dan Gallagher, a former sec commissioner now at Robinhood, said the current structure represented “a really good climate for retail”. A shakeup could face legal challenges, too. But Mr Gensler is right to be trying. Taking a punt on today’s violent stockmarkets is daunting enough. Investors should get a fair shot at it.Read more from Buttonwood, our columnist on financial markets:Tech investors are prizing cash generation again (Jun 9th)The return of the inventory cycle (Jun 2nd)Is China “uninvestible”? (May 21st)For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

U.S. stock index futures were modestly higher during overnight trading on Wednesday after the Federal Reserve implemented the largest interest rate hike since 1994.
Futures contracts tied to the Dow Jones Industrial Average added 0.22%. S&P 500 futures were up 0.23%, while Nasdaq 100 futures advanced 0.29%.

The major averages ended Wednesday’s session higher, with the Dow and S&P 500 both snapping five-day losing streaks. The 30-stock benchmark added about 304 points, or 1%, while the S&P 500 advanced 1.46%. The tech-heavy Nasdaq Composite was the relative outperformer, rising 2.5%.
The Federal Reserve on Wednesday announced a 75 basis point rate hike, which had been widely anticipated by the market.
“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” Federal Reserve Chairman Jerome Powell said at a news conference following the decision.
Stocks took a leg higher after Powell said that a 50 or 75 basis point increase “seems most likely” at the next meeting in July, indicating the central bank’s commitment to fighting inflation. Powell did caution, however, that decisions will be made “meeting by meeting.”
Individual members’ forecasts show that the Fed’s benchmark rate is now on track to end the year at 3.4%.

“At this point the market has done much of the Fed’s work for them in terms of stocks and bonds selling off over the past week – not to mention the entire year – so it’s not that surprising that both markets moved higher today (stock and bond prices higher; bond yields lower), given that they had sold off so much coming into today’s meeting,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

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Despite Wednesday’s bounce, the major averages are still lower over the last week and month, and remain sharply below their records.
The S&P 500 and Nasdaq Composite are both in bear market territory, down roughly 21% and 32% from their all-time highs in January and November, respectively. The Dow, meantime, is 17% below its Jan. 5 all-time intraday high.
Rampant inflation, which is at the highest level in 40 years, has weighed on the major averages, as have fears around slowing economic growth and the possibility of a recession.
“The market was very prepared, even late to the story,” Morgan Stanley chief U.S. equity strategist Michael Wilson said following the 75 basis point hike announcement. “There’s relief here,” he noted, before adding that the hike won’t solve the inflation problem overnight.
“It also raises the risk of a recession because you’re bringing forward rate hikes even faster, and I don’t think it’s going to help the bond market,” he said on CNBC’s “Closing Bell.”
Economic data out Thursday includes weekly jobless claims numbers, with economists surveyed by Dow Jones forecasting a 220,000 print. Housing starts will also be released, while Adobe and Kroger will report quarterly updates.

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