Markets
Asia stocks are trading with an upbeat tone as optimism over cooling inflation has traders placing markers on the softening trend to continue. With automotive fuel prices down by over 12% in December, the writing is on the wall, and US CPI should decline for the second time since 2020. Anything other could cause a mini wipeout.
Despite a solid start to the year, there should be a lot more upside to China’s stocks with earnings upgrades to drive further outperformance. Although we are not pitching a tent in that camp just yet, many investors are starting to believe China’s reopening could be faster than expected on pent-up demand, a robust economic rebound and fewer supply constraints.
Commodities
Consensus Global GDP growth forecasts for 2023 are nearly an entire percentage point below an already sluggish 2022. However, revisions to 2023 are unlikely to go lower. Instead, given the steady state of hard economic data amid a China reopening epiphany, growth revisions in all of the US, China and Europe are more likely to be revised up, sending a moderately supportive message for cyclical metals and risk markets in general.
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The global growth dynamic via support from China reopening suggests that oil prices are stabilizing without setting up a strong uptrend at this stage. With oil prices having a higher correlation with China’s GDP than the OECD, China reopening should be a key support factor in driving oil prices higher.
Gold has done well to weather the steepest rise in Fed Funds since 1969, as an uncertain macro environment should drive financial accumulation of gold, reversing last year’s washout.
Investors should favour gold over the other precious metals, as it has little to fear from weakening industrial production. The USD is likely to decline through 2023, which sets up a reasonably decent entry at the current levels, given the US dollar is just starting to embark on the expected downtrend.
Gold is still in demand from season trends, and physical buying should remain strong into the Chinese Lunar New Year.
