MARKETS
Stocks in Asia were mixed Friday, with China-linked markets trading higher. Japan’s Nikkei gave up its early morning gains and ended flat, while India’s Nifty 50 – the best performer in Asia this year – ended 0.5% lower.
European equities are trading lower this morning, with the STOXX 600 looking to close the year with -12% decline.
FOREX
After the local market closed, a positively eye-catching move on the Yuan produced a magnetic attraction across G-10. FX traders are diving in head first due to the pro-growth stance at the Q4 PBOC MPC meeting, anticipating a big stimulus dump on the way to assuage market concerns about the Covid spike.
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If I’m on the right track, CNH buy flows will continue regardless of what’s currently happening in the economy. The growth recovery and stimulus multiplier effects bode well for portfolio inflows and repatriation of dollar earnings.
OIL MARKETS
With Russia turning up the taps before sanctions take effect, physical traders will still need to find buyers who will likely lower their bids. And this could weigh on prompt contracts at the start of the year but does offer another buying opportunity.
China continues to be at the center of all things oil. Although widely expected, soaring coronavirus cases have been marginally weighing on prices, but the outlook appears bright given the potential for improving mobility in China. Still, we are heading into next year amidst continued volatility around the commodity macro.
However, we think markets are running overly pessimistic with their expectations on the China rebound. Given the massive reopening multiplier effect from the Pboc liquidity injections and how quickly mobility can return to trend post-COVID lockdown, we could see a significant oil price lift-off soon.
In the US, the vast difference in this business cycle is that the overheating labour market materialized in unprecedented job openings, which should prove less painful to unwind. Consistent with this, hard macroeconomic indicators and traffic congestion data indicate robust spot demand.
2022 Wrap
Global growth slowed sharply through 2022 on a diminishing reopening boost, fiscal and monetary tightening, China’s protracted Covid restrictions, and the energy supply shock resulting from the Russia-Ukraine war.
It was a challenging year for traders to navigate an entirely new set of shocks triggering the third consecutive year of outsized market swings. On the economic front, there’s little doubt that inflation was again the biggest story of the year, but this time it was accompanied by a surprisingly aggressive central bank response.
And now we head into 2023 with most of Wall Street on the same playbooks telling investors that the global economy will grow below trend, enter a mild recession and experience a bumpy reopening in China. These are hardly the things that stock market dreams are made of—suggesting that equity market rallies will still be met with bewilderment from some and ridicule from bears. But at the end of the day, US stocks are still very much a rates story, and even though we have the bulk of the FED rates hikes behind us, suggesting there will be less policy pain, still the higher Fed for longer could also mean little to no gain.
But the most fundamental question is this: how can the Fed bring inflation back to trend next year without something snapping? Especially now, with the inflation baton passed to services, a peculiarly tricky segment to wring out of the system.
