The end of a volatile year in the financial markets was marked by China’s decision to reopen its borders to foreign travelers.
China’s zero-tolerance COVID policy put the country in lockdown as of the beginning of the pandemic and this will change on January 8 with the minimal requirement of a negative COVID test for visitors.
The news bridges the old year and the new year with one of the biggest linchpins in the worldwide economy – China’s productivity. Even with growth rates well below pre-pandemic levels, China’s share of global gross domestic product (GDP) was around 19 percent this year. The World Bank sees China’s GDP growth at 2.7 percent for the full year 2022.
Looking back at 2022, it was a year of fits and starts as the financial markets drew away from pandemic conditions and faced the economic impact of the war in Ukraine, starting with a jump in commodity prices, and supply-side upheavals in the energy markets.
Q1 – inflationary pressures begin
As global COVID vaccine programs improved immunity to the disease, economies began to recover and then surged forward, prompting a rise in inflation. Even more inflationary headwinds came from the war in Ukraine which started at the end of February. Rising inflation was soon followed by the Federal Reserve’s first interest rate hike of the year in March.
The US Dollar gathered strength from higher interest rates and towered over other currencies in a trend that lasted for most of the year. The financial and energy sectors saw support from increased interest rate income and rocketing crude oil prices.
Companies began welcoming back employees on the premises and the job market began to tighten.
Q2 – Overblown crude oil prices drag on growth
Other parts of the world economy didn’t fare so well. As inflation weighed on manufacturing and construction costs, the prices of other commodities began to rise in tandem with crude oil. The outlook for corporate and consumer liquidity became more expensive as borrowing costs spiked.
Central banks, including the Bank of England (BoE) and the Reserve Bank of Australia (RBA), started to react to double-digit inflation by increasing interest rates, following the Federal Reserve’s hawkish path. A robust job market was one of the winds beneath the central banks’ wings.
Meanwhile, US, Asian and European stock markets became more volatile as borrowing costs weighed on investor sentiment and Initial Public Offerings (IPOs) were postponed or canceled.
Q3 – ECB joins rate hike relay
In July, the European Central Bank (ECB) joined the Federal Reserve and BoE to raise its key interest rate guidance for the first time in 11 years. The ECB had been cautious of damaging the EU’s growth prospects further amid the war in Ukraine but finally blinked in the face of surging inflation.
Q4 – Rocky stock markets
Central bank policies in the EU, UK and US began to reap rewards in the form of lower inflation. The Federal Reserve was firmly committed to its target rate of 2 percent inflation at the same time as recognizing the dangers of a recession. The central bank’s December rate hike was lower than the previous ones, partly reflecting the easing crude oil prices’ downward pressure on inflation.
Global stocks continued to weaken into a bear market characterized by brief rallies during earnings season and overall cautious sentiment as recession fears soured risk appetite.
Throughout four quarters of stubborn inflation and interest rate changes, two central banks remained relatively dovish: Bank of Japan (BoJ) and the People’s Bank of China (PBoC) after experiencing milder inflation rates than other countries.
What’s to come in 2023 is difficult to predict, it’d be wise to expect that uncertainty will be an ongoing theme. There are other themes that are likely to persist, starting with the major central banks’ determination to tamp down inflation with higher interest rates.
China’s economy is expected to rebound by 4.3 percent next year, according to the World Bank. The brighter outlook might also lift investor sentiment from its current slump at the time of writing.
The war in Ukraine appears to be heading for the one-year mark in February, unless a hoped-for truce or peace deal materializes before then.
As the prevailing expectation is for a recession in 2023, there could be pressure on growth in the job market, starting with the US where interest rates outstrip other large economies.
The Federal Reserve has made the most hawkish stand against inflation, so it’s unlikely the central bank will put the brakes on monetary tightening until the target rate of 2 percent is reached. This implies that Dollar currency crosses might remain under pressure from a strong USD. The USDJPY pair could remain volatile going into 2023, given the divergence in monetary policy between the US and Japan.
The ECB and BoE’s tightening has supported the EUR and GBP, and this trend might continue if the central banks keep boosting interest rates. Stronger currencies carry other notable risks, starting with the pressure on exports and rising trade deficits already seen in the UK and EU.
The headline commodity in 2022 was crude oil and its effect on prices in most sectors of the economy. This changed towards the end of the year after crude oil prices dropped sharply, mainly on recession fears.
If crude oil prices remain subdued, this could support demand for other raw materials affected by rising transportation costs, especially from countries like Australia which rely on mining exports.
Stock markets are expected to remain under short-to-medium term pressure to adapt to rising interest rate environments in the US, UK and EU. Policy divergences between the US and Japan might also influence investment appetite and direction if the USD gathers strength again.
Sectors like the semiconductor chip industry went through supply shortages and glut in the space of one year but demand is on a growth trajectory as interest grows in artificial intelligence, mixed virtual reality and other metaverse stocks. Read more about the top stocks to watch in the semiconductor industry here.
Wrapping up, a bright spot is that the pandemic is fast becoming a memory and – barring anything unexpected – once inflation is under control and interest rates stabilize, the global economy can concentrate on reinvigorating growth.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.