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December Investment Review: Central Banks Attempting to Restore Calm

by Haith Nori

Global equity markets in December saw a slight decline from their November highs in the run up to the holidays. Central Banks have hinted at slowing their interest rate hiking programme with the FOMC, BOE and ECB all raising interest rates by 50 basis points, lower than previous interest rate hikes of 75 basis points. This may pave the way for a potential end in sight. China has been easing lockdowns, re-opening areas around the country and lifting international travel restrictions. China’s re-opening should be better for business globally. The Bank of Japan also made a surprise announcement to change its bond yield control policy.

The US Federal Reserve made the decision to increase interest rates by 0.50% on 14th December 2022 which confirmed what the markets were expecting. This is the first 0.50% increase as the past four consecutive meetings, the US Federal Reserve have increased by 0.75%. Promising data has presented itself for US inflation for the 12 months ending in November 2022 of 7.3%, continuing its gradual decline since June. The decision to opt for a 50 basis point hike shows positive signs that inflation is reducing and confirmed that the beginning of a reduction in the pace of policy tightening has started. For the first time UK CPI data was encouraging, releasing a figure of 10.7% for the 12 months ending in November. Whilst this figure is still very high, we have seen a reduction from October’s figure of 11.1%. On 15th December 2022, The Bank of England also decided to raise interest rates by 0.50% to 3.5%, as analysts had been expecting, which, like the US, was also a reduction from the previous hike of 0.75%. On the same day the ECB made the decision to join the interest rate train by also increasing interest rates by 0.50%, pledging ‘further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation’[i]. Global Equity Markets reacted negatively to the interest rate news, which was all released in two consecutive days. The UK 10 year Gilt yield, the US 10 year Treasury Note yield and the 10 Year Bond yield all increased after the news was released and ended the month higher than at the beginning of the month. Global Markets reacted negatively to the Central Bank announcements in December 2022 but had a late surge, or Santa Rally, in the run up to the Christmas holidays. Sterling continued to decrease for the latter half of December against the dollar following the interest rate decisions, whereas the euro, after an initial decline, recovered to the end of December. Reaching the end of 2022, the US equity markets have had their worst year since the financial crash in 2008.

Elon Musk made an astonishing announcement that he would generate a survey amongst his 122 million followers as to whether he should step down as CEO of Twitter and pledged he would honour the decision of the results of the poll, be it negative or positive. A total of c.57% voted yes and Musk has since stated that he will step down once a suitable replacement is ready to take the reins.

On 20th December 2022, The Bank of Japan shocked markets ‘with a surprise tweak to its bond yield control that allows long-term interest rates to rise more, a move aimed at easing some of the costs of prolonged monetary stimulus’[ii]. Following the unexpected news, Japanese shares reacted negatively whilst both Japanese bond yields and the Yen increased. This caught many investors off guard given that analysts widely expected no change to yield curve control, especially in the run up to Governor Haruhiko Kuroda stepping down in April 2023. The decision was meant to ignite the dormant bond market. Hopefully, stability will be restored.

In the UK, manufacturing has seen a decline as there is less demand for new business. December saw the fifth consecutive month of contraction, as ‘British manufacturers are starting 2023 on the back foot, after they reported one of their sharpest falls in activity since the 2008-09 recession last month, reflecting a sharp fall in new orders and ongoing job cuts’[iii].  Unemployment rates have also risen in the UK as there are less vacancies available.

With China coming out of lockdown and ending their Zero-Policy Covid restrictions the country is seeing stocks improve in price on the basis that business, both domestic and international, will hopefully resume. Travel restrictions have been lifted allowing international travel from China but many countries including the US, the UK, Italy, India, Israel, Spain, Canada, South Korea, and France are all imposing the need to have a negative Covid Test and in Spain’s case, proof of vaccination. This is a positive step forward as ‘China may finally return to normal as the nation joins the rest of the world in learning to live with the virus’[iv]. There is still a long road to recovery ahead for China, but Global Markets will benefit from the good news and the new opportunities it will present.

Overall, December has still been slightly volatile for Global Markets but did not experience too many significant market shocks. Brent Crude continues to trade below $85 having dipped to a low of c.$76.10. The Federal Reserve has hinted at maintaining lower levels of interest rate hikes whilst the ECB stated there is still a large fight against inflation to go. Central Banks are continuing action to bring inflation down but at a calmer pace. The re-opening of China brings positive news to Global Markets. Japan has made a surprise move in its control of bond yields causing a shock. Bond yields have increased since the start of the month following the interest rate decision release.

[i] www.reuters.com/markets/europe/ecb-slow-rate-hikes-lay-out-plans-drain-cash-2022-12-14/

[ii] https://www.reuters.com/markets/rates-bonds/japan-set-keep-ultra-low-rates-doubts-over-yield-cap-grow-2022-12-19/

[iii] www.reuters.com/markets/europe/uk-manufacturing-ends-2022-low-orders-shrink-pmi-2023-01-03/#:~:text=LONDON%2C%20Jan%203%20(Reuters),orders%20and%20ongoing%20job%20cuts.

[iv] https://edition.cnn.com/2023/01/02/china/china-2023-lookahead-intl-hnk-mic/index.html

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