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Six down, six to go: the state of the markets 6 months into 2023

Fri, 07/14/2023 - 07:47

Just when it seemed like the worst was behind us, after weathering the pandemic and finally returning to something approaching “the old normal”, we were completely blindsided by an economic and energy crisis the likes of which hadn’t been seen since the 70s. Inflation ran riot, stocks plummeted, and fear was at an all-time high. But since the start of 2023, things have slowly but surely, almost unobservedly, begun to improve across all markets. 

The three biggest US indices (DJIA, S&P 500, and Nasdaq 100) are up around 10%, 20%, and 30% respectively since Q4 2022. Europe, too, has seen its flagship Eurostoxx 600 increase approximately 15% over the same period. Even China – which has had its own combination of a housing crisis and geopolitical uncertainty to deal with – has now begun to see a resurgence after over a year of stagnation. Forex, on the other hand, has been uncharacteristically volatile, with the dollar and euro making history. Gold and silver, meanwhile, have been surprisingly flat considering the fear and risk aversion characterising the market. Finally, crypto appears to have weathered the worst of the storm and is back to a certain level of stability. 

Six months into the year, we’re able to have a closer look into what factors were behind these market trends. 

Taking stock(s)

The global equities market has been on a rollercoaster ride ever since 2020. It started with the huge yet predictable crash once it became clear the world economy would be locking down, then we had a period of monster growth in just about everything but air travel, leisure, and hospitality – though tech and green energy were by far the best-performing sectors. This was followed by a series of small crashes and a long, protracted bear market in 2022 once it became clear that the end of the pandemic wasn’t going to be the panacea many had been hoping for and many of the largest gainers of 2021 were now hugely overvalued. After a very lengthy sideways channel, US and European stocks appear to have entered a new bullish cycle as of Q4 2022. As we touched upon earlier, Western indices are now up an average of 20% over the last six-to-nine months. This is somewhat unusual given the high level of inflation and correspondingly hawkish policy of the Federal Reserve. However, equities markets are usually ahead of the curve, and it could well be that the smart money had pre-empted a change of stance by the Fed amid the economic pain that was present.

East isn’t East

The recovery isn’t just limited to the West, though. After a period of uncertainty stemming both from internal factors like China’s tech crackdown and international geopolitical issues surrounding Taiwan and Hong Kong, Chinese stocks are also apparently entering a new growth phase. We’ll surely remember the infamous disappearance of Jack Ma and the last-hour scrapping of the Ant Group IPO – these examples and others promptly sent Chinese tech stocks into a prolonged tailspin. However, as of November 2022, China’s Big Three of Tencent, Alibaba, and Baidu have in fact gained around 60%, 25%, and 65% respectively. Much will still depend on Fed policy and a resolution to the ongoing geopolitical and economic crises. However, the Fed’s recent softening and the HKSE’s dual counter system are both positive factors for global stocks, including Chinese

Forex in the spotlight…for once

The traditional currencies market is often overlooked. We get it, it’s not as exciting or as fast-moving as stocks or crypto. But Forex is actually by far the largest market of all with trading volumes of over $40 billion every single day – and so when it goes nuts, people take note. And at the tail end of 2022, something highly irregular happened. That’s right, the euro and US dollar were briefly trading at parity – a quote that hadn’t been seen for over two decades beforehand. By the end of January 2023, however, we were already seeing a perfectly average 1.10 on the Fibre. The reasons behind this sudden recovery are less clear than the factors behind the initial disbalance in EURUSD. Effectively, the Fed started to ease off slightly on the hawkish rhetoric at a time when the ECB became serious about getting interest rates up above 4% in a bid to halt mounting price pressure. However, the dollar also has problems of its own. Recent geopolitical tension has demonstrated that the BRICs and other developing world nations are no longer afraid to trade dollar-denominated assets in their local currencies and this could lead to a long-term waning of the greenback’s strength. Investors would be wise to keep an eye on the 2- and 5-year Treasury bond yield for clues about short- and medium-term movement.

Don’t forget the metals

One asset class that some have called lacklustre over the past six months and earlier is precious metals. Ever since the pandemic struck, gold bugs and analysts alike have been calling a “commodities super-cycle” in which gold is tipped to top $3000. The reality, however, has been very different. Despite record inflation, geopolitical instability, and general economic uncertainty, gold was relatively flat throughout 2022 and the first half of 2023. In fact, until about January of this year, the yellow metal was toying with pre-pandemic price levels. Since then, however, gold is up almost 20% and has already breached its key resistance of $2000 per Troy ounce. The truth, as usual, is a bit more complicated than it looks at first glance. One of the main reasons for gold’s perceived weakness in 2022 was the uncharacteristically strong US dollar. In reality, gold had strengthened over 10% when quoted in euros, but the galloping greenback had virtually wiped out the dollar-denominated asset’s gains. That isn’t to say that gold isn’t looking strong on its own now that the currency market has normalized.

Cryptic clues

Any modern discussion of the market landscape wouldn’t be complete without at least a passing glance at digital assets. We’ll all surely remember the whirlwind boom cycle of 2020-2021, followed by the equally memorable “crypto winter” that saw Bitcoin lose almost 70% from its November 2021 ATH of $64,400. After sliding all the way to $16,529 on the last day of 2022, the first six months of 2023 have been overwhelmingly positive for the original cryptocurrency. Its current price of $31,187 marks an 85% increase in value YTD. Ethereum, too, is up a solid 55% since January, as well as numerous other major altcoins. This would suggest that the worst of the previous bear cycle is well and truly behind the digital assets market. As well as this, a new mining capacity comes online amid a more reasonable mining price of $17,000 per BTC. Institutions also appear to be predicting a bull market in 2023, with weekly capital inflows from investment funds backed by digital assets reaching $199 million last week. Another positive factor for both institutional and retail investment was the filing on 15 June by BlackRock, the world’s largest asset management firm, to list a spot Bitcoin exchange-traded fund (ETF). Much remains to be seen in this still volatile space, but crypto is definitely a much more welcoming sector than it was this time last year.

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