Weekly Market Wrap – Sunday, January 1, 2023
✅ After a bull market that lasted for 13 years since the Global Financial Crisis of 2008-09, financial markets experienced a massive pullback. In fact, 2022 is just one of five in the last 100 years where both bond and equity markets finished in the red. For most, seeing the back of 2022 is an absolute relief.
Two major themes defined 2022. Surging inflation and the war in Ukraine.
✅ Inflation’s surge to 40-year highs led the US Federal Reserve to an unprecedented rate tightening cycle, cratering the bond and equity markets into a bear market that extended into the end of the year – for the first time since 2008.
✅ In retrospect, 2022 was indeed the most difficult year for most investors. The distortions in the financial markets were unleashed by the change in the trend in interest rates. The end of easy money since 2009 saw sharp rises in interest rates. After enduring a year blanketed in uncertainty, recession worries are now increasingly being talked about as 2023 beckons.
✅ Relief over a potential slowing in Federal Reserve interest-rate increases was replaced by concerns that the US economy is both currently too strong to allow inflation to come down significantly and, at the same time, that a recession looks increasingly likely next year.
What can we expect for 2023?
✅ As 2022 draws to an end, analysts and commentators are increasingly talking about a possible recession in 2023. In fact, speculation about a potential recession has plagued much of 2022 and is now seen as all but inevitable in 2023. As recently as December, even JP Morgan Chase CEO Jamie Dimon reiterated that a recession is coming in 2023. He is not alone. Major publications like Time, The Economist, and Forbes magazines too are openly writing about an inevitable recession as we enter the Year of the Rabbit.
✅ But if the latest revision in the Q3 2022 US GDP number is to be believed, this dire prognosis runs counter to statistical reality. Or is it just the US economy seeing a potential revival while the rest of the world continues to see endemic growth? What is clear is the entire Euro Area remains mired with stubbornly high inflation accompanied by a wave of de-industrialization not seen since WWII due to surging energy prices.
✅ Over in Asia, the world’s second economy, China’s economy is crippled by the collapse in the real estate market made worse by intermittent and devastating lockdowns. Widespread protests across China resulted in the sudden lifting of its draconian pandemic restrictions recently. When China unexpectedly announced the lifting of Covid-specific restrictions, financial markets rejoiced as it signaled that China is reopening its borders and industrial productions can resume and more importantly, Chinese consumers will open up their wallets. But these hopes were quickly quashed as reports of a monster wave of infection sweeps through major Chinese cities and health facilities overwhelmed.
✅ Japan – the third largest economy – is not doing any better. Inflation is running at a 40-year high. To prevent the Japanese bond market from implosion due to global rising interest rates, the Bank of Japan (BoJ) resorted to yield-curve control, essentially capping bond yield from rising by massive buying of Japanese Government Bonds (JGBs). So much so, the BoJ like the ECB is now the single largest buyer of domestic sovereign bonds.
✅ Between saving the bond market and its currency, the Japanese Yen was sacrificed. The Yen fell an astonishing 34% against the Dollar by late October only to recover strongly to end the year at 131.12 for a loss of 13.91%. Towards the dying days of 2022, the BoJ threw in the towel and allowed the Japanese Government Bond (JGB) yield to trade above its artificial cap of 0.25%. While this move may potentially save the Yen (and that is a big if), it will have negative implications for both the JGBs and Japanese equity markets.
✅ As the Fed aggressively hiked rates, the interest rate differentials among its major trading partners widened, resulting in massive capital flow into the US. It is for this reason alone, that US equity markets may not collapse in 2023. Empirical evidence showed that most of this hot money flowing into the US ended up in US money market instruments and equity markets, particularly the blue-chip stocks. The relatively strong rebound in the Dow since October is a testament to this inflow of capital.
The war in Ukraine too had played a significant part in the shift in financial asset allocations- this time away from the mighty dollar. The US and the other G7 nations’ nations freezing of Russia’s central bank’s assets made the world sit up and took notice.
✅ Increasingly, we are seeing a shift away from nations in the BRIC and more significantly oil exporting nations like Russia and OPEC settling trades in their own currencies. This is a tectonic shift.
✅ Meanwhile, energy prices have pulled back significantly from their kneejerk reaction highs in March. But the worsening geopolitics and the depletion and subsequent replenishment of the US’s Strategic Petroleum Reserve plus the tight supply situation in Europe will underpin the global energy market. It is very likely, going into 2023, we may see a resurgence of energy prices.
✅ Similarly, the shift away from using the Dollar as a settlement currency may gain traction going forward. 2022 has seen an unprecedented buying of gold by central banks. It is widely reported that central banks bought a record 400 tons of gold this year – the biggest since the 1970s.
✅ The issue is not how many central banks have been buying gold, it is how they are buying it.
✅ Besides gold, silver trading on the London Bullion Market Association (LBMA) saw very strong demand accompanied by severe tightness in supplies especially after the LBMA banned Russia from dealing in London. This resulted in a shift to COMEX for deliveries.
✅ Because COMEX is not where delivery of precious metals typically takes place, its warehouse inventories are low – very low. Since hitting a low of $17.40/oz on September 1, silver prices have surged to the year on a strong note at $24.00/oz. For perspective, that is a rise of almost 38% in silver prices in the last quarter alone.
✅ Gold prices surged from $1618.30/oz in early November to the end of the year at $1826.20/oz for a gain of some 12.8%. This suggests precious metals will likely do very well from here onwards, especially silver.
✅ The end of ultra-low interest rates this year also saw the unraveling of cryptocurrencies. The term ‘crypto winter’ was coined in 2018 when cryptocurrencies went into a tailspin that saw Bitcoin prices lose more than 84% of their value from near $20,000 to $3,122.00.
✅ Last November saw BTC peaking at $69,000. Since then, we witnessed another massive collapse in prices to end 2022 barely above $16,400. This represents a loss of more than 76%.
✅ 2022 is also a year in which we witnessed many bust-ups in this space. In May, Terraform Labs got into trouble when its Luna and TerraUSD tokens lost their pegs. To date, its founder, Do Kwon has not been found. July was a particularly horrible month. Beginning with 3ACs, the world witnessed the swift collapses of Vovager Digital, Celsius Network, Vauld, Zipmex, and Babel Finance all in the span of a single month. The following month Hodlnaut halted all withdrawals. The mother of all crypto debacles was the sudden collapse of FTX and Alameda in November. Collateral damages are still reverberating through the crypto community. One by one, counterparties got into liquidity problems. Blockfi, a DEFI platform, announced it has a $275 million loan tied to FTX.
✅ What will 2023 bring? While traditionally, we wish each other a happy new year at this time of the year, 2023 may be anything but a happy year for most. This is because the major upheavals in financial markets that we witnessed in 2022 will extend into 2023 and beyond. While traditional investors may be in for another rough ride, it is all good for nibble traders.
