A year in review
View from the Trading Desk:
It's been a turbulent year in markets, with almost every asset facing some kind of selling pressure, with the blue-chip stock index, the S&P 500, down over 19% year to date. While stocks struggled, the US Dollar was in favour among investors as geopolitics, monetary policy, and commodity prices sent markets on a wild ride. FX volatility has also been on the rise since late 2021 as ultra-accommodative monetary policy pushed asset prices to record highs following the world's emergence from Covid.
Undoubtedly, the first significant event of the year was Vladimir Putin's invasion of Ukraine on the 24th of February. Investors subsequently sold off Russian assets as uncertainty surrounding Nato's response mounted. Financial penalties were subsequently implemented, with Russia expelled from the SWIFT payments system and oligarchs forced to sell assets owned abroad, most notably Roman Abramovich's sale of Chelsea Football Club.
Elsewhere, central banks were gearing up to hike interest rates to prevent what at the time was thought to be mild inflation that was not expected to be persistent. The Bank of England had already hiked at the end of 2021 and was seen by markets as ahead of the curve, but the sheer pace of the Federal Reserve hiking to a 4.5% target rate from 0.25% in just nine months sent the Dollar to its highest levels for 20 years.
As the war in Ukraine rumbled on, hopes that inflation would cool were fading as food and commodity prices began spiralling. Wheat prices reached almost $1300 per bushel in May as Ukraine's grain-rich exports were effectively halted. Russia's response to restrict its supply of natural gas via the Nord Stream pipeline only amplified these supply chain crises as European TTF Nat Gas hit €311 per MWh in August, an all-time high.
This sent governments across the globe into crisis mode as the cost of living began to rise. In the UK, some questionable fiscal policy decisions sent government bonds into free fall, nearly wiping out some pension funds as almost £50bn of unfunded tax cuts left a sour taste for investors. Cost of living concerns also gave rise to more right-wing conservative parties in Europe, as Giorgia Meloni came to power in Italy and fiercer candidates gained larger swaths of the voting public in countries such as France and Sweden.
Bottom line: It would be hard to predict another year packed with such a wide-ranging set of market events, a number of which we left out here. For 2023, peak hawkishness at the Federal Reserve seems to have been reached, and Dollar weakness is a viable prediction. The willingness to bring the US economy into a recession is likely to see some follow-through, with risk assets weakening in the first half of the year as interest rates look set to top 5% in the US. It's a tough road ahead for the UK, which has been faced with negative growth outlooks everywhere you turn, and the question for Europe will be if they can source a viable alternative energy source; now Russia is out of the equation, only time will tell.
The week ahead
Last week, the Bank of England delivered a 'dovish' 50bps rate hike, causing GBP/USD to tumble from the mid 1.24's interbank level down below 1.22 by Friday's market close. Two members of the Monetary Policy Committee voted to leave rates unchanged after November's jumbo rate hike as the BoE looks to weigh the risks of continued rate hikes on squeezing growth. Some analysts have speculated that this could cause Sterling to extend its recent correction lower as investors speculate on softer central bank policy action next year. Economists also expect the UK to be stuck in recession for most of 2023, which will offer little respite for Sterling. We head into a data-light pre-Christmas week where existing sentiment will likely provide direction for the Pound.
- Today, CBI Industrial Order Expectations for the month of December came in at -6 vs -5 previously, and not reaching the -9 forecast.
- On Wednesday, Public Sector Net Borrowing figures for November will be released. The forecasted figure is 12.0B.
- Finalised Q3 GDP data will be released on Thursday, with the expected figure not likely to change from -0.2%
- Also, Thursday, the BOE's Quarterly Bulletin will be released.
The Euro is currently sitting around a cent higher on the US Dollar from last week's open following the major data releases and central bank meetings of the past week. Many economists are now forecasting more aggressive policy action from the European Central Bank in 2023 as they look to tackle inflation that's five times its target. Christine Lagarde's hawkish rhetoric following the ECB's 50bps rate hike last Thursday has put a tailwind behind the Euro, which is now around 11.5% up on the Greenback since late September. We're heading into a data-light week for the Eurozone, but with liquidity thinning out, we could still see some outsized moves.
- This morning, German ifo Business Climate data for December was released. The print was 88.6, better than the expected 87.6.
- Eurozone Consumer Confidence for December is due on Tuesday afternoon. The forecast is for a reading of -22, up from -24 previously.
- On Wednesday, German GfK Consumer Climate data for December is due. The consensus is for a reading of -38 vs -40.2 previously.
Despite a slew of data and central bank meetings, the Greenback began and ended the week at much the same level, on a trade-weighted basis. On Wednesday, officials from the Federal Reserve's Open Market Committee voted to hike interest rates by 0.5% to a target range of 4.25% to 4.5%. However, some members went on record to say that rates might have to rise higher than current market expectations to bring down inflation, with the terminal rate now likely to top 5%. This has helped support the Dollar heading into the pre-holiday week, which sees a little more data out of the US than the UK or Eurozone. Markets will pay particular attention to the Core PCE release on Thursday as it is the Fed's most closely watched measure of inflation in the US economy.
- December's CB Consumer Confidence data is due on Wednesday afternoon. The expectation is for a gain from 100.2 to 101.0.
- Weekly Jobless claims are due on Thursday, with the forecast for a 224K print vs 211K previously.
- Finalised GDP for Q3 is also due Thursday. The consensus is an unchanged reading at 2.9%.
- The Federal Reserve's preferred measure of inflation, the Core PCE Price Index, is released Friday afternoon for the month of November. Markets expect the print to remain at 0.2%.
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