• January 9th, 2023
• By Midsilver Investment Limited

During the review period, financial markets were primarily influenced by alterations in expected monetary policies and shifts in economic forecasts. These changes resulted in two distinct periods: initially, from mid-September to mid-October, stronger than expected inflation readings bolstered near-future policy rate predictions. Subsequently, in November, the markets recalibrated their expectations downwards due to softer inflation readings and an economic slowdown. This caused heightened asset price fluctuations, exacerbated by limited liquidity across market sectors, leading to notable variations in global financial conditions.

Up until mid-October, markets closely followed the collective increase in anticipated policy rates. The unexpected inflation data in September led to a swift rise in investors' policy rate projections in core markets, causing an uplift in yields amidst scarce liquidity. This buoyed the US dollar while dampening the allure of riskier assets.

However, the latter half of October and especially November saw markets adapting to the perceived decrease in endgame rates. With a further inversion of the US yield curve, the US dollar descended from its historic highs against most other currencies, easing funding market tensions. Stock markets made up for previous setbacks, with European energy apprehensions relaxing, although the tech sector took a hit due to unsatisfactory earnings. There was a slight narrowing of corporate bond spreads, especially in Europe, but they remained substantial. Meanwhile, bond issuance activities were subdued, especially in the high-yield category.

Commodity prices in most markets relaxed, notwithstanding potential concerns ahead. Natural gas prices in Europe saw a significant drop, accompanied by a notable decline in crude oil prices. However, continuing supply interruptions reflected in increased prices for refined products, maintaining long-standing apprehensions about energy.

Emerging market assets, for the most part, emulated the trends observed in advanced economies (AEs). Sovereign yields climbed rapidly early in the review period, only to reduce later with the softening of the dollar and more relaxed financial circumstances. China stood out in October due to ongoing challenges in its real estate domain and a tepid consumer demand, which adversely affected stock prices, including those of its trade partners. This also prompted capital withdrawals from bonds, predominantly those issued internationally. Nonetheless, policy interventions in November provided a boost to Chinese assets.