December global commentary: World markets fade into year-end

December Global Commentary

World Markets Fade Into Year End

The 4Q22 rally faded into year-end (MSCI World -4.2% in December), though that was not enough to prevent global equities from delivering their first positive quarter of 2022 (MSCI World +10% QoQ), nor enough to push global equities back into a bear market for the year (MSCI World -18% YoY). Unfortunately, US tech stocks were less fortunate, as the tech-heavy Nasdaq 100 Index saw a 9% MoM drop wipe out all of its 4Q22 gains, leaving it comfortably in bear market territory for 2022 (-32.4% YoY) as Apple, Amazon and Alphabet all experienced double-digit share price declines in December. In addition, Tesla’s share price fell by 37% MoM after it announced production and price cuts in China and deep discounting in the US.

Mixed economic data preceded the US Federal Reserve’s (Fed’s) final meeting of an eventful 2022 as US employment data exceeded expectations, delivering more jobs and faster wage growth than expected, while inflation data showed prices slowing faster than anticipated. The Fed delivered a much-anticipated 0.5% rate hike (the seventh consecutive hike of this tightening cycle), breaking a sequence of four successive 0.75% hikes and pushing US central bank rates above 4% for the first time since early 2008. The post-meeting press conference conveyed the message that Fed members are getting increasingly pessimistic about the prospects of US economic and labour market activity in 2023. Nevertheless, they anticipate that the Fed will only likely start cutting rates in 2024 as it remains resolute in its goal of taming inflation.

The most significant central bank impact for December, however, was arguably the action of the Bank of Japan in widening the range it will tolerate for the country’s 10-year government bond yields in a shock move that led many investors to suggest that this may be the beginning of the end for excessively cheap funding rates globally. The prospect of positive lending rates in Japan, the world’s biggest creditor, may result in a major repatriation of funds lent globally in a move that could impact global asset prices and foreign exchange rates. The surprise move saw the Japanese yen strengthen by 5.3% MoM against the US dollar and was a catalyst for higher global rates, with the US 10-year bond yield rising by 0.3% to end the month at 3.9%.

The price of Brent crude oil ended the month broadly unchanged. In contrast, the iron ore price rallied (+12.1% MoM) on news that China was rolling back its zero-COVID policies that have hampered economic activity for the world’s biggest consumer of industrial commodities, outweighing reports of rising COVID-19 infections in the region.

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