Monthly Review: December 2022 - A Look at the Year Ahead. Recession? Fed Pivot, but When?

Overview

Welcome to our look back at the previous month and year, and a look ahead to what we might expect to see throughout January and beyond.

Regarding 2023, a recent Bloomberg survey of 500 Wall Street analysts was, in their words, “fresh pain for investors who just endured the great crash of 2022.”  Was it so great?  Check out the section below on US Equities.

The talk on the street, and in the boardrooms, is the strong possibility of recession going into Q2 or Q3 of 2023. The watchword for the next few weeks and months will be “Pivot”.  When will the US Federal Reserve reverse monetary tightening and the raising interest rates?  The big pivot!

China’s COVID lockdowns have had a major impact on markets for months now but there was a light at the end of the tunnel with protests against the government and new easing of restrictions and testing.  However, it seems that the Chinese vaccines are months out of date and the Omicron variant is causing death and havoc across the country.

China is the world’s second-largest economy.  When China catches a cold, the rest of the world has to sneeze along with it.

US Equities

To answer the question from the overview, Yes.  It was a great crash as equities lost about 2 years or more of gains.  The S&P 500, for example, (see chart below) fell from 4818 just over a year ago to 3492 in October. Price action followed the 200 DMA as a dynamic line of resistance and is still in a bear market.  The NASDAQ followed a similar path and is also in a bear market.

The Dow Jones Industrial Average, however, fared better finishing the year in a bull market.  (see chart below)

Going into January and Q1 of 2023, we should see a lot of uncertainty in the markets and, if a recession does in fact take hold, a sell-off and a general fall in the US and Global Stock Indices.  Having said that, we have all discovered, thanks to COVID and the resulting economic pain, that the playbook often gets thrown in the bin and that the majority of investors can be quite resilient and optimistic.  We can only hope that most analysts are wrong.  It won’t be the first time.

Keep an eye on the news as well.  Any hints that the US Federal Reserve will start its pivot sooner will help allay fears and boost equities.  On the other side, the idea of more interest rate rises and monetary tightening will be detrimental to equities.

USD 

On the other side of the US Equities coin is the USD.  If there is a 2023 sell-off of equities, due to a recession, for example, we will see USD strength.  (If you don’t believe me, just check USD charts after the 2008 meltdown).  Most of 2022 saw USD strength with an autumn reversal.  This occurred as the FX markets predicted, quite accurately, what the Fed would do with Interest Rates and QE/QT.

As mentioned above, the markets are now trying to predict when the Fed will pivot and return to Interest Rate cuts and QE.  Many analysts, including me, are considering a pause in Q2 and a resumption of rate rises and QE in Q3 or Q4 or both.

As always, the US Federal Reserve will be driven by the data so keep an eye on your economic calendars and don’t forget to follow Valutrades Market Blast videos every Monday and Tuesday.

Crude Oil 

The chart tells the story for 2022 with the price today at where it was one year ago.

Demand took a while to recover after the COVID pandemic and then, Vladimir Putin decided to shake things up creating supply issues, and driving prices to higher than $131 per barrel.

Now, the main factor determining the price of Crude Oil is China.  Continuing COVID deaths and sickness, leading the government to reimpose lockdowns, will curtail demand and drive prices lower still.  Of course, should production return to normal, we may see prices rise again.

Then, of course, we have the fear of recession which will definitely drive prices lower.  Watch this space!

Asian Equities

You may recall that last month we quoted some big money managers saying, “Get back into Asia!”  They obviously did but it looks like investors sold their Aussie and Japanese equities to buy in China and Hong Kong.  The 4 charts below tell the story with price action on the Hang Seng and China A50 heading above the 200 DMA.

JPY

Then again, the fall in the Nikkei may have something to do with the recent strength in the Yen.  Recent QE by the Bank of Japan, and hints that they might be finally leaning toward increasing interest rates this year, have also helped boost JPY and deplete the Nikkei.

2022 started with USDJPY at 115 and saw price action climb into the stratosphere to almost 152.  Even today, at 132, we feel that this is still high and expect it to fall.

You may be asking if JPY will regain its status as a safe haven currency.  We will know when price action on CHFJPY falls below 120.

Gold 

For the most part, price action went in one direction during November and December, finishing the year in the $1,820s.

Why?  A weaker USD means that Gold expressed as XAUUSD, will react inversely to the price action of USD. Also, with an impending recession, investors often see Gold as a safe hedge.

That’s all for now.  Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of January.