Sabco® Investment's Monthly Market Report - January, 2023

Sabco® Investment's Monthly Market Report - January, 2023

In January, financial markets experienced further confirmation of cooling inflation, aided by lower energy prices, which provided some relief for Europe. Additionally, the accelerated reopening of the Chinese economy was expected to benefit the region. As a result, equity markets had an excellent month, building on the positive momentum from the previous quarter.

Equity markets demonstrated a strong start to 2023, with Eurozone equities experiencing their best performance in history, rising nearly 10%. Emerging markets also performed well, while US stock markets underperformed due to disappointing economic data, such as retail sales and industrial production. This data reflected the weakness observed in leading indicators, signalling an impact on the actual economic data. Furthermore, the US fourth-quarter earnings season did not begin on a strong note, dampening stock market sentiment. European stocks, on the other hand, demonstrated remarkable performance, reaching nearly the same level as the previous year before the Ukraine conflict and energy crisis unfolded.

In the US, growth stocks outperformed value stocks significantly, while in Europe, the performance of both styles was relatively similar. The trend of falling inflation in the US supported the expectation of a potential shift in Federal Reserve policy, leading to expectations of lower interest rates later in the year.

Bond markets saw a decrease in 10-year bond yields both in the US and Europe throughout January. Volatility remained high, reflecting the divergence between growth concerns and uncertainty regarding monetary policy. The downward trend in US yields has been ongoing for several months, while German yields fluctuated within a range of 2% to 2.5% since September. This divergence reflects the more advanced interest rate cycle in the US and concerns about the US economy compared to Europe.

The downward trend in spreads of investment-grade and high-yield corporate bonds in Europe, which began in October, continued in January.

Although major central banks did not hold policy meetings in January, monetary policy remained in the spotlight. Some members of the Federal Reserve expressed support for a slower pace of interest rate hikes, while the Bank of Canada raised interest rates as expected but indicated a pause to assess the impact of previous hikes. Members of the European Central Bank delivered restrictive comments, indicating further interest rate hikes in the first half of the year, with at least two hikes of 50 basis points each expected in February and March.

The US dollar continued its decline in January, weakening against the euro for the fourth consecutive month. The relative interest rates and the Federal Reserve's less restrictive stance contributed to the decline. The dollar also lost some appeal as a safe-haven currency due to receding economic uncertainties in Europe and China. As a result, the dollar weakened against other major currencies as well. Commodity prices were supported by the evolution of commodity prices, and other dollar currencies held up better than the USD.

Industrial metals experienced significant increases in prices, with copper, zinc, iron ore, and aluminium rising by 10% or more in dollar terms. The faster reopening of the Chinese economy prompted companies to restock in anticipation of increased demand. However, doubts remained about the construction sector's recovery and global demand.

Brent oil prices remained stable overall, not following the upward trend of industrial metals. The slowdown in global growth weighed on oil demand expectations. European gas prices continued to decline, reaching levels not seen since September 2021.

Gold prices continued to rise in January, surpassing $1,900 per ounce. The expectation of a slower pace of interest rate hikes by the Federal Reserve, lower real interest rates, a weaker dollar, and purchases by non-Western central banks diversifying their reserves contributed to the positive performance of gold.