Global Asset Allocation Team Market Update – January 2023
A tumultuous year in financial markets ended on a downbeat note, as lingering anxiety about inflation and central banks’ efforts to rein it in raised recession risks and unnerved skittish investors. Meanwhile, investors also contemplated Beijing’s move to dismantle strict pandemic controls and officials’ latest efforts to reflate the ailing Chinese economy. However, the pro-growth policy shift was largely overshadowed by fears that stronger growth in the world’s second largest economy will keep global inflation elevated. For 2022 as a whole, global stock markets endured their worst annual performance since the global financial crisis in 2008, while global bond markets capped their biggest annual slide in decades, underscoring the case for private markets strategies in a well-balanced portfolio.
Global equity markets ended an erratic year on a defensive note, with the MSCI All Country World falling over 4% in December. Losses were widespread across the globe as investors continued to grapple with the impacts of soaring prices and hawkish monetary policy that are inevitably set to take their toll on the economy and corporate earnings.
Fixed income markets also retreated in December and closed-out a year of historic losses. Global bond yields spiraled higher on fears that persistent price pressures would force the world’s major central banks to tighten further. Even the dovish-leaning Bank of Japan joined the chorus of hawkish central banks and unexpectedly doubled the cap on its 10 year bond yield to 0.5% (from 0.25%) as it starts to pivot from its ultra-accommodative policy stance, while China’s decision to relax coronavirus curbs and stimulate the economy added to inflation fears and sent shock waves throughout global bond markets last month.
The US dollar (DXY) retreated in December as cooler U.S. inflation data prompted wagers for a downshift in fed fund rate hikes, while Beijing’s rapid reversal in Covid restrictions buttressed the Chinese yuan and dampened demand for the safe haven greenback. The euro soared higher after several European Central Bank officials set the stage for further half-point rate hikes in the coming months and reiterated that there’s more ground to cover as the battle against inflation rages on, with one official saying the central bank has “only passed the halfway point” in the tightening cycle. The yen clawed back some of its annual losses in December after the Bank of Japan raised the ceiling on 10-year bond yields in a surprise move, which stoked expectations that the central bank may eventually raise interest rates.
Finally in commodity markets, oil was virtually unchanged at just above $80/barrel at year-end as investors contemplated a potential rebound in Chinese demand following the relaxation of stringent Covid Zero policies, while investors also braced for Russian sanctions to squeeze global supplies heading into 2023. Copper advanced following the pro-growth policy pivot in China, which sparked hopes for a revival in commodities consumption. Gold also rallied in December as signs of softening U.S. inflation spurred expectations for a slowdown in monetary policy tightening, while the weaker dollar also buttressed bullion prices.