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Market Update December 2022

No Santa Claus rally for equities to end 2022

  • Global stock markets ended 2022 on a negative note.

  • Headline annual UK inflation rate dipped to 10.7% during November. The US rate also fell to 7.1%.

  • Both Bank of England and US Federal Reserve increased their key borrowing rates by 0.5%.

  • US November jobs report was stronger than expected, which fuelled expectations of further rate hikes.

  • BoE data shows that UK mortgage approvals have fallen to their lowest level since the start of the pandemic.

  • ·G-7 finance ministers announced a $60 per barrel price cap on Russian Crude Oil.

  • ·UK government announced that it will open the first new coal mine in the country in 30 years in Cumbria.

  • China continued to relax its zero-Covid policy. US joins list of nations requiring Covid tests for travellers from China.

  • The Japanese Yen surged after Bank of Japan raises cap on key bond yield.

December is traditionally a strong month for equities, but investors were left disappointed in 2022, with the MSCI World Equity Index falling 5.2%. Most of the damage was done in the early part of the month, triggered by a data release showing that the US economy added more jobs than expected in November, which the market interpreted as adding pressure on the US Federal Reserve (Fed) to keep raising interest rates.

The Fed and Bank of England both raised their key borrowing rates by 0.5% later in the month. Fed Chairman Jerome Powell accompanied the rate hike with a speech that certainly held firm in his stance of managing market expectations of a much anticipated “pivot” from raising interest rates to starting to consider a cut. He warned investors that “it will take substantially more evidence to give confidence that inflation is on a sustained downward path”. At least we have now made a start.

Historically there is a lag of five months between a peak in the rate of CPI inflation and the last Fed rate hike. In the autumn we started to see some tentative signs appearing that the labour market is softening, which should herald the deceleration in wages into 2023 which the Fed wants to see. The “inflation peak” has probably been hit, which should allow a less rapid pace of rate hikes next year.

US equities led the decline in December, with the S&P 500 Index sliding 6.7%. The Index ended the year down 18.1% in local currency terms, the 7th worst loss over the past century, and the largest since 2008. Electric car maker Tesla was amongst the largest fallers as it published disappointing deliveries data. The share price declined close to 37% to end 2022 down 65%, its worst year ever.

European shares held up better as the extreme investor pessimism towards the region as a result of its proximity to the war in Ukraine and reliance on Russian energy, continues to ease. The EuroStoxx50 Index fell only 1.8%.

The recovery for Chinese equities continued during December after the government scrapped much of its zero-Covid policy and Chinese health officials softened their tone and acknowledged that the Omicron variant is less deadly than other Covid variants. The prospect of home isolation, (remember those days), in China rather than mass quarantine in designated hotels along with dropping testing to attend public places must be a welcome relief and will hopefully help to calm some of the social unrest we have seen in recent weeks. The MSCI China Index gained 4.2% over the month.

The aforementioned jobs data also caused bond yields to resume their ascent. The yield on 10-year UK government bonds jumped from 3.2% to 3.7% during December, which brings the rate closer to that available on equivalent US bonds, currently 3.9%. During the month, the BoE continued to offload the government bonds it brought between September 28 and October 14, when it stepped in to stabilise the market after prices slumped after September's mini-budget.The BoE currently owns more than a third of the UK Gilt market and is expected to be selling around £240bn of Gilts a year to unwind the £800bn Quantitative Easing scheme and correct a huge debt imbalance. The question is who will step in to buy the bonds being sold, given that foreign investors are also snapping up far less UK bonds than they have previously, according to JP Morgan.

The Bank of Japan surprised markets during the month by indicating it would raise the cap on its 10-year government bond yield. The 10-year bond yield jumped from 0.25% to 0.4% on the day of its announcement, its biggest daily shift since 2003. This switch from ultra-loose monetary policy (in contrast to much of the rest of world that have been tightening policy during 2022) caused the Yen to surge. It gained 4.7% versus Sterling over the month. Elsewhere in currency space, the US dollar continued to fall. It slid a further 1% versus Sterling.

The weaker dollar helped the price of gold. It rose close to 3% to leave the shiny yellow metal trading at its highest level since June.

The impact of 2022 will be felt for many years to come, with a seismic shift in monetary policy and, once more, war returning to Europe. The move from monetary support to one of tightening to tame inflation remains the financial story for 2023, as it has been throughout 2022.

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This document has been prepared for Ermin Fosse Financial Management LLP and is for information purposes only.

It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product.

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Please contact us before you invest / disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.

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