Global Asset Allocation Team Market Update – December 2022
In November, expectations for a dovish pivot in monetary policy following some tentative signs of peaking inflation spurred a massive relief rally across asset classes, while whispers of a China re-opening and new stimulus measures to shore up the economy added to the positive mood in markets. The release of the minutes from the Federal Reserve’s November gathering and a speech from Chair Powell at month-end added to evidence that the central bank is about to dial-back the aggressiveness in its rate hike campaign. Still, as warned by various officials throughout the month, the Federal Reserve’s work is far from complete and rates are likely to move higher than previously thought as the battle against inflation rages on.
Global equity markets surged higher in November, with the MSCI All Country World gaining 7.6%. Both the S&P 500 and the S&P/TSX advanced over 5% last month, while international stocks (+11.1%) outperformed their developed market peers by a wide margin. Emerging market stocks (+14.6%) led the global charge and capped their best monthly gain since May 2009 amid optimism that China is laying the groundwork for an eventual exit from its Zero Covid policy.
Fixed income markets also generated positive results in November. Bond yields spiraled lower as investors bet that central banks are getting a grip on inflation and the Federal Reserve hinted at a possible slowdown in the pace of rate hikes. As a result, investors now expect the Fed to opt for a 50 basis point hike in December instead of the super-sized 75 basis point increases seen at previous meetings. The U.S. 2-year treasury yield fell by 17 basis points to 4.31%, while the 10 year treasury yield tumbled 44 basis points to 3.61%. The Barclays U.S. Aggregate Bond index rose 3.7% for the month. In Canada, the FTSE Canada Universe Bond Index (+2.8%) also gained momentum last month, with the 10 year Government of Canada bond yield falling by 31 basis points to 2.94%, while the 2 year yield held firm at 2.88%.
The U.S. dollar (DXY) slipped as the latest revival in demand for riskier assets prompted outflows from the safe haven currency. The dollar posted its worst monthly performance since 2009 (-5.0%). Both the euro (+5.3%) and the pound (+5.1%) gained as investors unwound long positions in the greenback, while the yen also advanced (+7.7%). The Canadian Dollar (+1.6%) also appreciated against the greenback, albeit less-so as the monthly slide in crude prices limited any notable gains in the loonie.
Finally in commodity markets, gold ended its seven month losing streak and jumped 6.4% after the Federal Reserve signaled its preparing to slow the pace of interest rate hikes, which sent both treasury yields and the U.S. dollar lower and boosted the appeal of bullion. Copper surged 10.5% as investors bet China may shift away from its crippling Covid Zero policies, while some newly-announced measures targeted at supporting real estate activity also boosted the demand outlook in the top metal-consuming economy. By contrast, crude oil (-6.9%) declined last month amid growing worries over the deteriorating global demand landscape, even as the supply backdrop remains restrained.