Market update 20 February 2023
We ended last week with a slate of hawkish comments from central bankers – a reminder that they aren’t done tightening interest rates just yet and that market expectations for rate cuts later this year are probably much too soon, given the inflation outlook.
From the ECB, Isabel Schnabel and Francois Villeroy de Galhau both spoke about the risks of more persistent inflation and explicitly pushed back against market pricing. Schnabel claimed that markets are “priced for perfection” when it comes to inflation, while Villeroy de Gallhau suggested rate cuts in the Eurozone are “definitely not for this year”.
Those comments followed some from a couple of hawkish Federal Reserve regional presidents, Bullard and Mester, both of whom suggested they would have preferred to keep hiking by 0.50% at the Fed’s last meeting, rather than stepping down to 0.25% increases.
Otherwise, most major equity indices were a little lower on Friday, with the MSCI World down -0.4%. The energy sector was the worst performer in both the US and UK.
Non-US equities, particularly China and emerging markets, have had a stellar run over the last few months, but that outperformance has paused in recent weeks as investors look for more confirmation that the China reopening trade is still on. The dearth of data out of China at the beginning of the year hasn’t helped and whilst property market indicators do show a recovery in sales and prices has started, it is not yet a powerful one. As such, with many investors still skittish about exposure to China after the turmoil of 2022, non-Chinese assets that can benefit directly from reopening, like other emerging markets and destinations for Chinese capital and tourists, are likely to outperform in the near-term.
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