This year’s mayhems took quite the toll on market sentiment starting from peaking inflation, policy changes, geopolitical turmoil, China’s covid-19 restrictions, crypto downfall, an energy crisis and rocking headlined recession fears that in due course led to the meltdown of the Equity market that fed into rising speculation and comparison to the Dow Jones crash in 1930 and perhaps felt too familiar to the 08’ recession.
Let’s start with the immense changes central banks around the world have stirred in the economy as they adhered to a more aggressive monetary policy shift by raising interest rates to curb inflation. Pulling out the initial liquidity that they had pumped in the market in attempt to reconfigure the 2020 pandemic bubble.
Separate from the rest of the world, The Bank of Japan, despite their persistence of ultra-easing policy, and I must say with all admiration, it was mind-blowing to see Japan’s inflation not pinnacle above 4% (still the highest in 4 decades at 3.7%), despite the super easy policy. The yen though was adversely affected stripped from its own safe-haven title.
A commodity turnaround
Meanwhile inflation levels in the US shot up to 9.1% in June. Inflation in the UK hit a 41-year high to 11.1% and Germany hitting a 3.9% decade high.
Other than policy changes, peaking inflation, Ukraine- Russia repercussions, disrupted supply chains, and rocketing oil prices. That have immersed in 2022. One would think that this would have resulted in the upsurge in haven demand, but unrealistically this theory has now become skewed. Especially gold changed hands with the US dollar almost plunging below the $1600 handle, hitting a familiar low near $1620.
Scaling back to materialized themes of this year, was the tremendous upsurge of oil prices. Triggered by the Russian invasion on Ukraine, placed sanctions on Russian oil, adding to that OPEC+ decision to cut production tightening supply resulting in elevated oil prices. Although China being the second largest importer prolonged lockdowns seesawed oil prices. Giving both bulls and bears enough suspense for the next coming year.
WTI sky-rocketed above the $125 handle in early March in anticipation of the Russian oil ban but is now struggling to keep above $80. Meanwhile saw tops of $131 and is currently near levels of $83. China’s demand is likely to rebound while Russian oil caps are likely to stay the same at least for the short term. Both factors will keep oil price swinging but ultimately recession fears could take the biggest toll on the black gold prices.
A rocketing dollar
In the currency market, most currencies were subject to severe devaluation but especially against the US dollar.
To begin with, the overall performance of the dollar index was quite exceptional or must i say victorious, having hit its absolute high near levels of 115. The greenback, which is now trading near levels of 103, saw its saw its strongest momentum in 2022 powered by a hawkish Federal Reserve.
Meanwhile the British pound had hit freefall touching new lows near 1.03. with rising speculation on if it were to drop below parity reported Bloomberg. Subject to remarkable volatility from rock bottom to oversold levels on the relative strength index. Despite the UK’s considerable upheaval in terms of their ruling parties, to start off with Boris Johnson’s scandalous exit and an even more shocking exit by Liz truss after 49 days of taking position, to finally Rishi Sunak’s turn of events.
The UK entered an unannounced recession with shattered economic figures, bleeding out both the pound and the FTSE 100. In addition to the bits and pieces of resurfacing Brexit residue, a much-needed emergency central bank intervention. While suffering from the effects of the energy crisis that shook the whole economy. But I have to say that the cherry on top was Liz trusses illogical mini budget of 43 billion pounds that caused public uproar and a major spike in borrowing costs. On a more easing note, at least it’s safe to say that the UK’s sterling has found a silver lining at the end of the year, trading currently near levels of 1.20.
Equiti markets on edge of a cliff
Equity markets are expected to continue to underperform in the short term, as interest rates keep rising going above the 5% rate. Major indices entered a bear market early on this year with agreeably expectations of equities to underperform massively in the first half of the year. The S&P 500 plunged more than 17% this year while currently trading near levels of $3,795, down from its peak of $4,818 in January and up from its yearly low of low of $3,491. Expectations for the S&P remain dim, with big banks like Morgan Stanley and Wells Fargo warn of bigger falls to come short term as companies downgrade their earnings target.
Many sectors suffered from underperforming, with tech being the biggest loser after witnessing quite the boom in 2021. Hits close to home doesn’t it, perhaps the dot com bubble that tells us that will be difficult regaining that footing as per the rally of 2021. Mega giants such as Amazon lost 50% this year alone only projected recession, it makes us wonder how growth stocks will grapple more difficult times ahead.
Continual warnings and a dented outlook took us to a turning point Where “buying the dip” was no longer the case, as projections kept decreasing. Causing somewhat a case of market fatigue.
Within the context of likely probabilities, we are likely to see a challenging quarter for equities in the first quarter of the year underlined by recession fears that have indeed spooked markets. If one thing we have learned that markets are in fact super cyclical yet its still quite tough to catch up with the historical intervals, primarily due to capitalized uncertainty. But its quite certain that markets have priced in a dark outlook for the first quarter of 2023 with a whole lot of baggage there but with optimal hope, the year could see specific sectors flourish.