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The ‘Grinch’ did good business during the Christmas period, as December proved to be a tough month for the markets. In their ambition to combat inflation, both the ECB and FED announced interest rate hikes in 2023. This burst the bubble of optimism that had emerged over the past two months.
Bonds, just like stocks, proved volatile in December after interest rates briefly shot up in Europe and Japan. The US Dollar cleverly exploited this in its value against the Japanese Yen and Euro. Surprisingly, crude oil and gas prices softened the situation, due to a severe winter in the northern hemisphere. Emerging markets took a hit in December, after the euphoria from the relaxations in China quickly turned due to rapidly rising Covid infections.
Best fund performance in December 2022: UBS (Lux) Money Market Sustainable Fund +0.11%
Developed market equities had two challenges to deal with in December. The central banks and an increasing number of Covid infections in China. The Federal Reserve meeting in December resulted in an interest rate hike in the US (0.5%) and indicated more rate hikes in 2023. This serves as a reminder from the FED that tackling inflation is the highest priority for central banks in the United States. Even if they have to cause some short-term pain in the market to achieve this. European stocks followed their US counterparts. This resulted in a fall in both the Stoxx 600 in Europe and the S&P500 in the US.
A bright spot in the dark month of December was the drop in ‘crude prices’ for oil and gas in Europe during the month. To the great relief of consumers affected by an unexpectedly severe winter.
Emerging market equities performed better than the developed variant. Notably due to the announcement that the Covid policy in China was being scaled back. Initially, this created a lot of optimism, but that enthusiasm quickly turned due to the growing number of infections. It is expected that the situation in China will first worsen before it improves.
US and European 10-year yields deviated for the first time this year, with 5 basis points in the US and 30 basis points in Germany.
High-Yield Bonds and Corporate Bonds showed a negative return, but since the ‘credit spreads’ (the difference in interest rates between two different types of bonds) are not widening, this is generally a good sign that the financial market is stable.
The value of the euro against the dollar (EURUSD) revalued during the month. From a euro perspective, this led to poorer results for Global Equities and High-Yield Bonds. Money market rates continued to rise in Europe, which is expected to continue into the following month after the ECB meeting in December.
🔮 Quarterly results and inflation data, which play an important role in estimating the risk of a recession and in determining the rhythm of interest rate hikes in 2023.
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