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Article | 05 December 2022 | Investments
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MARKETS
Equities
Global stocks rallied strongly (MSCI World Index +6.8%), boosted by hopes that central banks may be less aggressive in raising rates, as well as signs that China may be easing its zero-Covid policy. This marks the first back-to-back monthly increase in global shares since mid-2021. The S&P 500 Index rose 5.4%, while the EuroStoxx 50 Index rallied 9.6%. Emerging markets were especially strong (MSCI EM Index +14.6%), helped by a decline in the US dollar. Chinese stocks, in particular, soared (MSCI China Index +28.9%), lifted by re-opening hopes and measures to help embattled property firms.
Bonds
Global bonds also rose, as signs that inflation might have peaked sparked speculation that central banks could start to slow the pace at which they hike interest rates. The 10-year US Treasury bond returned 3.7% as yields declined around 30 basis points (bps) over November. The 10-year German Bund rose 1.4% as yields moved back below 2.0%, a decline of around 20 bps compared to levels at the end of October. Emerging market bond returns were even stronger. as a fall in the US dollar lessens the debt burden of countries that borrow in US dollars.
Currencies
The US dollar weakened on growing expectations that the Fed would start to scale back the pace at which it raises rates at its December meeting. The euro and British pound appreciated 5.3% and 5.1% respectively against the dollar. The Japanese yen rose even more (+7.7%) as the Bank of Japan hinted it might change the policy targeted at keeping bond yields within a low range.
Commodities
Oil prices fell, with Brent crude closing the month 9.9% lower at $85.4 a barrel, as the outlook for the global economy darkened. Despite the overall decline, oil prices staged a late-month rally as sentiment was lifted by hopes of stronger demand from China if it eases its strict Covid-19 restrictions. Wheat prices also fell back as Russia extended its agreement to allow the safe shipment of Ukrainian grain. Elsewhere, metals prices generally moved higher, with gold rising 8.3% to close at $1,784.5 a troy ounce.
Market volatility
Volatilty continued to ease, with the Vix Index dropping 20.5% over November to close at 20.6. A reading below 20 is widely viewed as an indicator of market stability.
Responsible investing
The COP27 climate summit in Egypt agreed to establish a ‘loss and damage’ fund to allow vulnerable countries to be compensated for damage caused by climate change. Key details still need to be agreed, including who precisely foots the bill and which countries will be defined as vulnerable. However, the summit fell short on an agreement to phase out fossil fuels, further jeopardising the ability to hit the maximum 1.5°C warming target agreed at the Paris summit.
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BRIEF
China might be easing its strict zero-Covid policy, following a month of widespread protests and a sharp slowdown in economic activity. Despite record high infection levels, there appears to have been a shift in emphasis recently, with a higher focus on vaccinating the elderly, more relaxed restrictions for close contacts, and home isolation rather than centralised quarantine.
Early estimates of the annual inflation rate in the US and eurozone for November fell compared with October, coming in below forecasts, raising hopes that inflation might have peaked. The increase in factory gate prices has eased and oil prices have also fallen back.
The US Federal Reserve (Fed) raised interest rates by 75 basis points in November, its fourth consecutive rate hike of that magnitude. However, recent reports suggest a majority of policymakers are now in favour of slowing the pace of future rate increases.
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RADAR
The US Federal Reserve’s rate-setting committee meets for the final time of 2022 in mid-December. In a speech at the end of November, Fed chair Jay Powell dropped a strong hint that the Fed was preparing to slow the pace of rate rises, with a 50 bps hike likely in December.
It was only in October that China’s President Xi Jinping reaffirmed his commitment to zero-Covid. With daily cases at a record high, economic growth slowing sharply and protestors calling for him to leave office, the president now needs to find a way to re-open China’s economy – but without overwhelming health care services. It will be a tricky balancing act.
The EU will continue in trying to reach agreement on a price cap for Russian oil. As part of a wider agreement with G7 nations, the cap will prohibit the insurance and shipping services needed to transport Russian crude oil, unless the price is set at or below the cap.
