What’s happening in markets?
Nasdaq 100 (NAS100.I) dropped 33% S&P 500 (US500.I) slid 19% in 2022
U.S. equities were closed on Monday. Last Friday, Nasdaq 100 edged down 0.10% to finish the year of 2022 with a 33.1% decline, its worst since 2008. S&P500 was off 0.3% on Friday and slid 19.4% on the year. In 2022, energy stood out as the lone gaining sector with the S&P500 and rose a stunning 59%. All the other 10 sectors declined and communication services, down 40.4%, consumer discretionary, down 37.6%, information technology, down 28.9%, and real estate, down 28.5%, were the laggards. Throughout the year, the stock market was driven down by higher interest rates which resulted from the Fed slamming hard on the brake after waking up to the fact that the inflation genie had been out of the bottle. Stocks bounced from their October lows in November as the Fed’s hawkish rhetoric peaked and investors started positioning for a pause of the Fed in tightening in Q2 2023 but the rally lost momentum in December. The outlook for equities remains challenging as inflation may not be falling as much as investors are hoping for in 2023. For a detailed review of 2022 from a wider perspective of the structural shifts beyond interest rates, we refer you to our Head of Equity Strategy, Peter Garnry’s brilliant article, Equites in 2022: a fork in the road for globalization. You can also find the technical analysis of major equity indices from Kim Cramer Larsson, Saxo’s Technical Analyst, on his note, Quarter Technical Outlook – S&P 500, Nasdaq 100, DAX, FTSE 100, FTSE 250 and Hang Seng Index. For a summary of Peter and Kim’s views on the equity outlook for 2023, you can listen to this special edition of the Saxo Market Call here.
US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) had a huge down year not seen for decades
The U.S. Treasury market was closed on Monday. In 2022, yields on the 2-year soared 372 basis points to 4.43% from 0.72% in 12 months. Yields on the 10-year jumped 237 bps to 3.87% from 1.51%. The iShares 20+ Treasury Bond ETF (TLT:xnas) plunged 32.7% in 2022. The sharp rise in yields and decline in prices in Treasury notes and bonds meant that investors had few placed to seek safety and the popular 60-40 portfolio, which protected investors well in the Great Financial Crisis in 2008 did not work this time in 2022 as both bonds and stocks were dragged down by the rise in inflation and therefore interest rates. As yields have risen to levels that provide more meaningful returns and the Fed has signaled a shift to a data-dependant risk management mode of operation, we argue that bonds will be a valuable component again in diversified investment portfolios. Nonetheless, as inflation, while its growth may be slowing, will likely stay at elevated levels, there are likely to be opportunities again for investors to pick up bonds at yields higher than the current levels in 2023. Treasury inflation-protected securities (TIPS) look attractive at 1.6% real yields plus inflation compensation (currently at 7.68% p.a.; likely to fall towards 4% in 2023) in the form of indexation of the principal to the consumer price index. For details, please refer to our recent Fixed Income Updates: Bonds to shine in 2023 as the U.S. economy slows and the Fed moves into a risk management mode, and Elevated inflation and Fed downshift could potentially be a sweet spot for Treasury Inflation-protected Securities (TIPS).
Hong Kong’s Hang Seng (HIZ2) and China’s CSI300 (03188:xhkg) rallied since November 2022 on China’s shift in Covid containment policy
The Hong Kong and China equity markets were closed for holiday on Monday. Over the year of 2022, the Hang Seng Index was down 15.5% and the CSI300 Index slid 21.6%. Over the past two months, stocks traded in Hong Kong and mainland China rallied as the China has effectively abandoned its stringent Dynamic Zero-Covid policy and moved to reopen the economy despite the surge in cases of infection. While it is inevitable to see further surges and more widespread in inflection at the initial stage of opening, the outlook for the Chinese economy has brightened for 2023. In addition to the reopening, China has intensified its effort to support the distressed property sector and given property developers access to credits and equity financing which had been denied to them for the most part of 2022. The Chinese authorities have also shifted to more friendly gesture towards private enterprises, in particular the internet platform companies in the recent Central Economic Work Conference. This new development, together with improvement in the credit impulse since last summer, the outlook for Hong Kong and mainland Chinese equities have gained a more positive tendency for 2023.
FX: US dollar stumbles into the New Year
In his latest note, Saxo’s Head of FX Strategy wrote that the year 2023 is starting off with the US dollar on its back foot even as US treasury yields rose into year-end as the market continues to believe that we are nearing the end of the Fed rate hike cycle, with easing to follow, while the ECB has grown increasingly hawkish and the Bank of Japan is seen further adjusting its policy mix under new leadership from early Q2. Will the first key data of 2023 on Friday, the U.S. employment report, play well with the market’s strong convictions?
Commodities’ continue to have a positive outlook in 2023
We maintain an overall bullish view on commodities, especially in energy, industrial metals, and precious metals for 2023 despite the near-term price volatilities that will be driven by the state of the U.S. economy and the development in the reopening of China from Covid containment. Saxo’s Head of Commodity, Ole Hansen, discussed the outlook for commodities in this special edition of the Saxo Market Call podcast.
What to consider?
U.S. recession is unlikely to come anytime soon as the market is expecting
In his latest Macro Digest: Powell just started the next bull run in commodities, and a special edition of the Saxo Market Call podcast: A look ahead at 2023 with Steen Jakobsen, Saxo’s Chief Investment Officer, Steen Jakobsen argues that the U.S. economy is going to run hot in Q1 2023, as opposing to the market’s expectation of a recession. The U.S. services sector and the labor market are resilient and the fall in gasoline prices since last summer is a tailwind to consumer spending.
The long-term equilibrium of U.S. inflation is likely to be 4% than 2%.
While the growth of the headline inflation may slow somewhat, the structural inflationary force of deglobalization means the long-term equilibrium of inflation in the U.S. will more likely to be at around 4% rather than the 2.25% that the bond market and inflation derivative market are currently pricing in and many other asset prices base their valuation on.
The Fed may not be able to deliver rate cuts as the market is hoping to get
As the U.S. economy is resilient and not falling into a recession and inflation stays well above the Fed’s on average 2% target, the Fed is unlikely to be able to cut rates in the first half of 2023 or may not even be able to do some in the whole year of 2023. The Fed may pause and become data dependent and focus on risk management including ensuring proper market functioning and the U.S. federal government’s ability to service its mounting debt burdens.
In the equity space, the tangibles are likely to do well in 2023
A resilient U.S. economy, elevated inflation, higher costs of capital due to high interest rates and more realistic equity valuation, and China reopening provide the backdrop for the tangible industries, such as defense, mining, energy, and biotech to outperform in 2023. The board equity markets may retrace as the disappointment of Fed easing kicks in but 2023 may turn out to be a positive year for equities driven by the tangible industries and companies that can improve productivity or be innovative.
China’s PMIs declined further in December
China’s Official NBS manufacturing PMI fell to 47.0 (consensus: 47.8; Nov: 48.0) and non-manufacturing PMI slid to 41.6 (consensus: 45.0; Nov: 46.7), further into contraction. The weakness was board-based and seems to be a result of the surge and widespread of Covid inflections during the initial stage of abandoning stringent containment measures.
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