Equity markets: 2023 is off to a strong start
Equity marketsposted a strong performance in January, continuing the positive momentum from the fourth quarter of 2022. Indications of cooling inflationary pressures that were already emerging at the end of last year were confirmed in the past month, especially in the United States. That positive trend was complemented by lower energy prices giving the European economy more breathing space, while China will benefit from the accelerated reopening of its economy. This evolution was reflected in the stock market performance of those regions. Eurozone equities, for instance, experienced the best start to the year in their history, rising almost 10%. Emerging markets also performed strongly, while US stock market underperformed. US stock markets had to cope with some disappointing economic data (retail sales, industrial production). This shows that the weakness that had been evident in the leading indicators for some time is now starting to materialize in the 'hard' economic data. The observation that the US fourth-quarter earnings season did not get off to a strong start did not contribute to stock market sentiment. What is striking about the performance of European stocks is that they are almost at the same level as a year ago, when the war in Ukraine had not yet started and the energy crisis had yet to erupt.
In the US, growth stocks significantly outperformed value stocks, while in Europe the performance of both styles was fairly similar. The firmer trend of falling inflation in the US keeps the expectation of a 'Fed pivot' intact. US growth stocks benefit from the prospect of lower interest rates later this year.
|MSCI EMU NR||9.6%||14.5%||9.6%||-0.6%|
|MSCI EUROPE NR||6.8%||10.1%||6.8%||-0.2%|
|MSCI USA NR||4.7%||-3.9%||4.7%||-6.5%|
|MSCI JAPAN NR||4.4%||6.3%||4.4%||-3.7%|
|MSCI EM. MARKETS NR||6.0%||11.2%||6.0%||-9.3%|
|MSCI AC WORLD NR||5.3%||1.0%||5.3%||-5.0%|
Bond markets: bond yields lower
10-year bond yields in both the US and Europe fell over the past month to 3.4% and below 2.0%, respectively, before rebounding somewhat. In both cases, the month's lows involved a drop of 50 basis points since the start of the year. Volatility remains high in the bond market, which is a symptom of the split between growth concerns and monetary policy uncertainty. The trend has been rather downward for several months in the US, while German 10-year yields have fluctuated within the 2% and 2.5% range since September. It reflects the more advanced interest rate cycle in the US compared to Europe and the economic concerns that have evolved to the disadvantage of the US in recent months.
The downward trend in spreads of both investment grade and high yield corporate bonds in Europe that started in October continued in January.
Central banks: towards a slower pace of rate hikes
There were no policy meetings of major central banks in January, but monetary policy nevertheless remained at the centre of attention. A number of Fed members spoke in favor of scaling back the pace of interest rate hikes to 25 basis points in early February, but the ‘raise-and-hold’ scenario remained nevertheless prominent.
Canada's central bank raised interest rates by 25 basis points, as widely expected, bringing the policy rate to 4.5%. However, the BoC stated more explicitly than expected that it will keep policy rates at current levels to assess the impact of past rate hikes.
Members of the European Central Bank still delivered restrictive comments ahead of the policy meeting in early February pointing to further interest rate hikes during the first half of this year. At least two interest rate hikes (February and March) by 50 basis points seem highly likely.
|Fed funds||4.25-4.5%||+0.50%||Dec. 2022|
|ECB deposit rate||2.0%||+0.50%||Dec. 2022|
Currencies: dollar continues to slide
The dollar continued its downward trend in January, weakening against the euro for the fourth consecutive month. The Federal Reserve has not been the most restrictive central bank among developed countries for several months and relative interest rates are weighing on the US currency's exchange rate. At the same time, economic uncertainties in Europe (energy crisis) and China (zero-covid policy) receded into the background, causing the dollar to lose some of its appeal as a 'safe haven' currency. Consequently, the dollar weakened not only against the euro but equally against the other major currencies (dollar index). The other dollar currencies held up better than the USD, supported by the evolution of commodity prices.
Commodities: industrial metals higher as China reopens
Industrial metals went sharply higher in January. Prices of copper, zinc, iron ore, aluminium, ... rose by 10% or more (in dollar terms) over the past month. They thus continued the upward trend since November. The faster-than-expected reopening of the Chinese economy after the abandonment of the zero-covid policy is prompting companies to restock in anticipation of increasing demand. However, doubts remain whether the Chinese government's support measures will be enough to allow the construction sector to recover, while global demand is also expected to remain weak.
Brent oil prices did not follow the upward trend of industrial metals and remained stable on balance over the past month. The global growth slowdown is weighing on oil demand expectations. The European gas price continued its decline, quoting below 60 EUR/MWh, a level not seen since September 2021.
Gold prices continued their advance in January, rising above $ 1,900 per ounce. Expectations for a slower pace of interest rate hikes by the Federal Reserve, somewhat lower real interest rates and a weaker dollar were elements supporting the gold price. In addition, purchases by non-Western central banks (China, Russia, ...) diversifying their reserves away from the dollar were also a positive factor.