In January 2023:
1/The Central Banks Fight Against Inflation Continues, 2/ Buyers of Risky and Non-Risky Assets, 3/ Europe versus the US.
1/ The Central Banks Fight Against Inflation Continues. Fed officials warned against underestimating their determination to keep interest rates high for some time. US headline and core inflation up 6.5% and 5.7% respectively, marking their slowest advance in a year. The Fed was expected to downshift to smaller rate increases to reach 5% and rose its rate by 25bps as expected by the market. Powell’s comment that the “disinflation process has started” suggested that the tightening cycle is starting to have its desired effect of reducing the pace of price growth. However, the strong employment market may suggest a more hawkish tone moving forward. The hawkish ECB rose its 50bps and suggested that another hike of that magnitude would follow at the next meeting. The BOJ kept its accommodative policy regardless the 4% inflation print.
2/Risky and Non-Risky Asset. To start the year, risky and non-risky were in favor. On one hand, equity, as measured by the SX5E, rose by 9.75% and the CDS on EUR HY debt improved by 59.74bps to 4.14%. On the other hand, Gold rose by 4.19% and buying pressure on the German 10Y dragged its yield 25.32bps lower to 2.318%
3/Europe Versus US. Energy prices are the main driver of European inflation. The war in Ukraine put commodities under pressure in 2022. In January, Natural Gas, Wheat, Oil, Coal came back to pre-war levels. The SX5E rose almost twice as much than the SPX and got closer to retrace its 2022 loss. On the other hand, the SPX has retraced 50% of its loss so far.
January Performance highlights (USD)
· Equity Indices: SPX: +6.18%, MSCI WORLD: +7.00%, MXEF: 7.85%, MSCI EUROPE: 8.30%, NASDAQ: 10.62%, SX5E: 11.37%, MXCN: 11.7%
· Bonds: GER 10Y: -29bps, US 10Y: -37bps, GER 2Y: -11bps, US 2Y: -22bps
· Commodities: Gold: +5.72%, Oil: -1.65%, Natural Gas: -40.02%
· FX: DXY: -1.38%, USDJPY: -.79%
From a regional perspective, Japan, UK and International equities were bought while US and European equities were sold. On the fixed income side, strong appetite for EU and US government bonds.
· On equity indices: The MSCI EUROPE, MSCI USA CLIMATE CHANGE recorded a mixed activity. NASDAQ, STOXX 600 BASIC RESOURCES and MSCI WORLD ESG were sold. The EUROSTOXX 50 and the MSCI WORLD were in favour.
· On fixed income: US TREASURIES on the 1-3Y, 3-7Y, 7-10Y and 20Y+, the IBOXX EURO SOVEREIGN and the BLOOMBERG GVT 30Y were bought. The German 0-1Y GVT and the SOLACTIVE EURO OVERNIGHT were sold.