Market Overview on February 2023

April 27 2023

| Tags: Financial Market, Geopolitical, global financial market, globe, macroeconomic
2023 so far January and February have seen an erratic start to 2023 for most of the major financial markets assets classes, with markets torn between two competing factors. These are the still hawkish positions from the global central banks in raising interest rates to fight inflationary pressures, and the concerns that national economies could be tipped into recessions by the higher rates, even as macroeconomic data stays strong. We will look at these factors in more details, highlight the impacts on the financial markets assets classes, then look at what to watch out for in March and into Q2, plus the prospects for the coming months. Macroeconomic/ Geopolitical Developments The primary macroeconomic developments so far in 2023 has been the ongoing increase in interest rates from the major global central banks, with the interest rate hikes that were seen in 2022 starting to have the desired impact on reducing inflation. This was most notably seen by the US Federal Reserve easing the pace of its interest rate increases from 0.50% to 0.25% at its last meeting at the beginning of February, although they have continued the mantra of “higher for longer”, interest rate markets have begun to price in the expectation of a peak in Fed rate of just above 5%, although markets are still anticipating a rate cut by the end of 2023, which the Fed have been far from implying. Elsewhere, the European Central Bank and the Bank of England have continued on their right hike paths but have acknowledged that inflation has begun to come under control. Global growth data, alongside consumption and output data has stayed relatively strong throughout the first part of 2023, as has the global labour market. In a somewhat counterintuitive way, this stronger economic data in February has actually proved to be negative for risky assets, like stocks, as the resilience of the global economy opens the door to even more hawkish positioning from central banks and possibly higher interest rates. What’s Moving in The Markets? So, what has been the impact of these somewhat competing factors of higher interest rates, recessionary concerns, but strong economic performance thus far in 2023? January was highlighted by a strong start to the year for risky assets, with global stock markets posting extremely strong performances. However, the theme of higher interest rates, higher global yields and strong economic data, has seen a far more negative performance from global stock averages in February. Global bond markets have seen a significant sell-off throughout February, which has taken European, UK and US yields to multi-month peaks. In the Forex space, January saw a significant weakening of the US Dollar, as markets priced in a soft landing and a more positive, “risk on” environment. However, US Dollar strength has returned throughout February, as stock markets have retraced lower and US yields have hit their highest level since November 2022. March And Q2 Prospects and What to Watch As ever, we are going to continue to watch for the strength of the economic data coming through for the global economy and the labour market, but critical remains the levels of inflation and whether indications of a renewed bout of inflationary pressures seen in February will extend into March. In addition, we will watch with interest the tone from central banks and in particular the US Federal Open Market Committee (FOMC) decision on interest rates on 22nd March. In addition, mid-April will bring the next round of corporate earnings, which are a must watch after a rather poor performance from the Big Tech mega caps in January’s earnings season. And what are the prospects for March and Q2? If inflationary pressures do not return, then we would expect stock indices to perform well for the balance of Q1 and into Q2. This should also see central banks start to pivot away from their more hawkish positions. However, any upswing in price pressures would likely see a more hawkish shift from central banks and a more negative theme for stock indices. Although we favour the former, more positive scenario, the more negative prospect is still a very real risk. Author – Mr. Steve Miley Sr. Investment Advisor

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