Global Asset Allocation Team Market Update – February 2023
The new year got off to a roaring start on rising hopes for a soft landing for developed economies as inflationary pressures showed continued signs of abating, while China’s reopening also fueled investor optimism at the beginning of the year. While central banks have downshifted the pace of tightening in response to moderating inflation, the focus now turns to the implications of cumulative rate hikes on both the economy and corporate earnings. Here, early signs are pointing towards some fundamental deterioration, which remains at odds with the latest revival in risky assets.
Global equity markets had a stellar January as expectations for a dovish pivot in the monetary tightening cycle saw price-to-earnings multiples re-rate higher. The MSCI All Country World rebounded 7.1% last month. Regionally speaking, gains were widespread across the globe. The S&P 500 posted a 6.2% monthly return, while the S&P/TSX jumped 7.1%. Looking abroad, European stocks (+8.5%) posted their best January since 2015, while emerging markets (+7.9%) thrived on the back of Beijing’s pro-growth policy shift that bolstered Chinese stocks (+11.8%).
Fixed income markets also rallied strongly on widespread anticipation that central banks are nearing the end of the tightening cycle as inflationary pressures subside. Government bond yields slid lower in response. In the US, the 2 year treasury yield fell by 22 basis points to 4.20%, while the 10 year treasury yield declined by 37 basis points to 3.51%. The Barclays US Aggregate Bond Index rose 3.1% for the month. Similarly in Canada, the 2 year Government of Canada bond yield fell by 30 basis points to 3.75%, while the 10 year bond yield declined by 38 basis points to 2.92%. Consequently, the FTSE Canada Universe Bond Index also rose by 3.1%.
In currency markets, the US dollar (DXY) retreated for the fourth straight month as the environment of improved risk appetite and a narrowing of rate differentials between the United States and the rest of the world weighed on the counter-cyclical greenback. By contrast, the pound, euro, yen, and Canadian dollar all strengthened versus the US dollar last month. Specifically, the euro and the pound advanced after fourth quarter GDP results provided a better-than-anticipated assessment of recent economic conditions across the Eurozone and the United Kingdom.
In commodity markets, crude oil fluctuated throughout the month and capped a third monthly loss as concerns about the looming economic slowdown in developed markets overshadowed optimism over a revival in Chinese demand. Turning to metals, gold extended recent gains on investor hopes for a less-hawkish Federal Reserve, which saw both treasury yields and the US dollar edge lower throughout the month and boosted the appeal of the yellow metal. Finally, copper soared higher following China’s emergence from Covid lockdowns that has set the stage for a revitalization in demand from the top-consuming nation, which comes at a time when stockpiles remain thin given some supply disruptions from major producers in Latin America.
[…]
Q4 2024 Investment Outlook & Portfolio Strategy