Weekly Market Update Monday 16th January 2023

US inflationary pressures ease, setting equity and bond markets up for a rally

Year-on-year US inflation data weakened in the month of December, falling to 6.5%, down from 7.1% recorded the month before. This, combined with softer average hourly earnings data released last Friday, which came in at 4.6% for the year to December versus 4.8% in the previous month, set markets up for a rally. Expectations rose for a smaller, quarter of a point rate rise at the Federal Reserve’s January meeting, with the expected peak in rates falling beneath 5%. European industrial production for the month of November exceeded forecasts, rising by 1.0%, easing fears over the severity of any impending recession. Whilst UK GDP growth for November eked out an increase of 0.1%, beating estimates of a fall of 0.2%. A sharp fall in European energy costs, helped by a mild winter, has no doubt been a significant contributing factor.

Hong Kong stocks close to a 50% rise since their 2022 low

As of 12pm on Friday, London time, the US market rose by 2.3% over the week, whilst the US technology sector recorded an increase of 4.1%. European and UK stocks rose by 1.6% and 1.8% respectively, whilst Japanese equities rose by 1.5%. The Australian market increased by 3.1%, supported by rising metal prices, a result of the relaxation of Covid restrictions in China. Emerging markets were up 3.0%, with the Latin American component increasing by 4.8%, also benefitting from the rebound in commodity prices. Hong Kong and Chinese stocks continued their recent recovery, rising 3.6% and 1.2% respectively, with the former having risen by 48% since their 2022 low point hit at the end of October.

On the back of the decline in inflation, government bond markets also rallied, with 10-year US Treasury yields, which move inversely to price, falling to 3.47%. German bund and UK gilts also rallied, with 10-yields falling to 2.13% and 3.33% respectively.

Easing Covid restrictions in China supports rising commodity prices

Gold continued its steady ascent, rising 2.0%, now trading at $1,907 an ounce, having risen over 15% since its low in November. Whilst copper prices leapt up to $9,169 a tonne, an increase of 7.0%. Iron ore increased by 5.7%, and crude oil rose by 7.8%, with Brent crude now trading above $80 a barrel at $84.7. All beneficiaries of the relaxation of Covid rules in China and a weakening in the US dollar as US interest rate expectations are dialled down.

US dollar weakens as rate expectations abate, boosting liquidity in financial markets

The US dollar index, which is a measure of the US dollar against a basket of internationally traded currencies, fell by 1.4% over the week, with the Euro worth $1.08, and Sterling close to $1.22. However, the biggest move amongst the more actively traded currencies was reserved for the Japanese Yen, which strengthened by 2.6% versus the Dollar, 1.9% versus Sterling and 1.0% versus the Euro as markets applied pressure to the Bank of Japan to further relax their yield control measures on the 10-year JGB (Japanese Government Bond). Japanese inflationary pressures have gradually increased in recent months, with core inflation, that is, excluding food and energy, hitting 3.7% in November, a high number by Japan’s standards!

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