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Global markets are “risk-on” despite rising Interest Rates: Market Commentary February 2023

Global Macro: Central banks are winning the war against inflation

The US Federal Reserve has further increased its main interest rate by 25bps, with the Fed funds rate target range now reaching [4.50%; 4.75%]. The rate hike was in line with expectations and marks the second consecutive meeting where the increase has been scaled back. The Fed’s monetary policy Committee anticipates that continued rate hikes will be necessary to achieve a restrictive monetary policy that will ultimately bring inflation back to its target of 2%.

The European Central Bank (ECB) raised its deposit interest rate by 50bps to 2.50% at its February meeting, marking the highest level for the deposit rate since 2008. The ECB is committed to maintaining a monetary policy that is restrictive enough to bring inflation back to its 2% medium-term target. To achieve this goal, the central bank has pledged to increase rates at a steady pace and has already indicated another rate hike of 50bps in March.

  • In the US: The economy creates more jobs than expected

The strong job creation numbers in the US in January (+517k) came as a surprise to most economists and analysts, who had predicted a much lower figure (market consensus: +185k). The gains were led by several key sectors, including leisure and hospitality, professional and business services, as well as health care. The unemployment rate also fell significantly in January, reaching 3.4%, the lowest level since May 1969 and below the consensus forecast of 3.6%.

  • In Europe: Improved sentiment despite the war

For the first time since June 2022, the Eurozone has seen a resurgence in business activity. The private sector recorded an S&P Global Eurozone Composite PMI (Purchasing Managers’ Index) reading of 50.3 in January 2023, up from a preliminary estimate of 50.2 and an improvement from the previous month’s 49.3. This growth was attributed to the rebounding of services activity and the easing of the pace of contraction in the manufacturing sector. Although new orders continued to decline, they did so at a softer pace. Meanwhile, the rate of job creation increased to a three-month high, showing positive signs for the Eurozone’s economy. The manufacturing sector saw a decrease in backlogs of work, while the overall trend of input cost inflation continued to ease, reaching a 21-month low. However, output prices saw a slight increase in January. Overall, despite the war in Ukraine, the improvement in business confidence, which reached a nine-month high, reflects the growing optimism in the bloc’s economic future.

ECB deposit rate: From -0.5% to 2.5% in one year

  • In China: Full re-opening of the economy

The Caixin China General Services PMI rose from 48.0 in December to 52.9 in January, pointing to the return of growth in the services sector after a 5-month decline. The recent lifting of pandemic restrictions and faster-than-expected peaking of infections played a decisive role in the growth. New orders increased for the first time in five months, driven by higher customer numbers, particularly in new export business. Employment declined at a slower pace and backlogs of work rose at the fastest pace since May 2022. Input cost inflation increased for the first time in five months due to higher raw material, staff, and fuel expenses, while output cost inflation moderated as efforts were made to attract new business. Overall, sentiment strengthened, underpinned by the recent easing of Covid restrictions.

In 2023: USD/RMB symmetric collapse

Equity: Global equity markets strongly rebounded in January amid improving investor sentiment (S&P 500 +5.8%; Euro Stoxx 50 +9.0%; Nikkei 225 +4.7%), with Chinese equities benefiting from China’s re-opening (HSCEI +10.4%). Fixed Income: The 10-year US yield contracted 31bps to 3.53% in the first month of the year, while the 10-year German yield lost 29bps to 2.27%, which contributed to the rise of Emerging Market bonds (+2.8% in USD; +1.7% in local currencies) and High-Yield bonds (+2.8% in USD; +2.2% in EUR). Currencies: The USD continued its weakening trend in January: EUR +1.9%, AUD +3.8%, CNY +2.7%, JPY +1.3%, CHF +0.9%. Commodities: Gold further gained 6.6%, while oil prices edged up 1.0%.

Start of 2023: Global markets are “risk-on”

  • Equities: Rally with volatility

Global markets are exhibiting a “risk-on” attitude at the start of 2023 with equities on a rally, though with some volatility. In January, global stocks returned 7.2%, with the Chinese market leading the way with an 11.7% increase. The improving economy in China and the Eurozone is boosting Chinese and European equities. The re-opening of China is expected to drive export demand, while a weakening US dollar could benefit the Chinese stock market. We note the MSCI China Index is still trading at a 40% discount to the MSCI World Index. This discount, seen at a 12-month forward P/B ratio of 1.5x (compared to an average of 2.5x), is historically consistent with positive performance over the next 12 months.

  • Currencies: Dollar reversal

USD: Return of the de-dollarization trend

The greenback rose on Friday, following a 9-month low in January, after a surprising jobs report complicated the Federal Reserve’s plan to slow down its pace of tightening. Despite the improvement, the USD remains down more than 10% from its September peak as the Fed delivered a smaller 25bp rate hike, which was widely expected, while Fed Chair Jerome Powell emphasized that the “disinflationary process has started.”

EUR: Fragile rebound with the war in Ukraine as a threat

The euro extended losses below USD 1.09 after reaching  USD 1.1034 last Thursday, the highest since April. The decline was due to investors turning towards the USD after strong US jobs data. Following the expected 50bp interest rate hike, pushing borrowing costs to the highest level since 2008, the ECB signaled one more increase of the same magnitude for next month and emphasized its commitment to combating high inflation. However, ECB President Christine Lagarde acknowledged that the Eurozone’s outlook has become less concerning for both growth and inflation during the press conference.

GBP: Economic growth worries continue to hamper the pound

The British pound’s value continued to decline towards USD 1.21, staying near its weakest level since January 6th, following the release of a better-than-expected US jobs report, which prompted a rush towards the dollar. This, combined with the Bank of England’s perceived dovish stance compared to the ECB and US Fed, has put additional pressure on the pound. Despite the UK central bank’s 10th consecutive interest rate hike to 4%, the highest since 2008, policymakers believe that inflation may have peaked, signaling that their tightening cycle may be coming to an end.

RMB: Rebound following a decline in USDRMB

As the Fed increased interest rates by only 25bps (vs 50bps last time) and stated that the disinflationary process has started, the USDRMB declined towards its support level of 6.70, which is being tested by the market. The next support level is 6.30 (cf. the USDRMB graph). We note the movement of USDRMB in 2023 is very symmetrical to the movement in 2022, with each increase from last year corresponding to a decrease this year due to the declining global inflation.

The offshore yuan appreciated towards 6.7, moving back to its strongest level in seven months, as the Fed’s reduced rate hike size and progress in its inflation fight has ignited hopes that the tightening cycle may be coming to an end. Strong holiday spending and tourism data during the Lunar New Year celebrations, as well as Beijing’s vow to promote consumption and boost imports, have also raised hopes for continued economic recovery in China. Meanwhile, The People’s Bank of China (PBoC) kept its key lending rates unchanged for the fifth consecutive month at its January meeting, reaffirming its monetary policy stance.

JPY: Valuation level stuck until BoJ exits its zero-rate policy

The yen declined more than 1% to 130 last Friday after a strong US payrolls report raised expectations for a higher terminal rate by the Fed, causing the USD to rise. Nevertheless, the yen remains close to its strong levels of May 2022, benefiting from a weaker USD and speculations that the Bank of Japan (BoJ) might shift away from its ultra-accommodative policy soon. However, we note the central bank kept its policy unchanged last month, and traders are closely monitoring its March meeting for potential changes, as well as the arrival of a new BoJ governor in April.

  • Bonds: Interest rate volatility

January saw a drop in US Treasury yields, as the market grew increasingly confident that the end of the Federal Reserve’s rate hiking cycle was near. The 10-year US Treasury yield went from 3.84% at the start of the month to 3.53% at the end. Meanwhile, the 2-year yield decreased from 4.46% to 4.20%. The fixed income market saw positive returns, with US credit yielding 3.8%, high-grade up 2.5%, and US dollar emerging market sovereign debt up 3.2%. US dollar and euro high-yield credit posted returns of 3.9% and 3.2%, respectively, as risk appetite improved and spreads narrowed. The yield on the 10-year German Bund also declined, going from 2.55% to 2.27%, despite the perception that the ECB is farther away from ending its tightening cycle compared to the Fed.

  • Commodities: Price normalization in 2023 to be correlated to global growth

A shift in global economic growth could boost the demand for commodities, particularly oil and industrial metals. China’s speedier recovery is expected to positively impact energy and industrial metals. Shortages in supply and even cuts in production are also seen as factors that could drive up prices for oil, industrial metals, and certain agricultural products. In January, the broadly diversified Constant Maturity Commodity Index (CMCI) recorded a total return of slightly over 2%. Metals drove this increase, with industrial metals rising by 8% and precious metals seeing a nearly 5% hike. The agriculture sector showed positive returns, while energy and livestock declined. China’s re-opening, as the country accounts for about half of the world’s demand for industrial metals, helped support copper and aluminum prices. Strong central bank demand and a weaker dollar also boosted gold. Despite facing strong pressure at the beginning of the year, crude oil was able to partially recover in January. In the meantime, mild weather in the US, which experienced the third warmest January on record, heavily impacted US natural gas prices.


  • Russia-Ukraine war escalation: A worsening of the war would affect Europe the most, and if the Russian army crossed the Belarus border, which is 150km north of Kiev, EURUSD could drop fast towards 0.90. In addition, the US and Asia could suffer a stronger economic slowdown amid surging commodity prices.
  • President Biden’s loss of power: The US president’s mental and physical health is a cause for concern. A disruption of the US presidency could generate impactful instability domestically and globally.
  • Covid variants: New waves of infections caused by Covid variants could further weigh on the economic growth outlook.
  • US-China tensions: US-China friction remains strong, with increasing tension around Taiwan and the South China Sea. In addition, the US is maintaining pressure on Chinese companies listed on US stock exchanges by implementing stricter rules targeting Chinese firms, effectively leading to the delisting of Chinese stocks from US exchanges in favor of Hong Kong and Shanghai.
  • Increasing defaults for High-yield corporate bonds: The realized default rate of High-yield bonds in Western economies has been low (<2%); however, slowing economic growth combined with higher financing rates may result in higher corporate defaults.


  • Income from safe cash deposits: Cash can be safely placed in cash deposits and earn several percentage points of annualized net interest, e.g. over a period of 6 months: USD 5%, EUR 2.5%, GBP 3.5%, RMB 2%.
  • Income from Investment Grade bank bond issuers: Banks are implicitly protected by central banks and their bonds have already mostly integrated the ambitious interest rate hiking cycle. Investors can enjoy a substantial yield from a diversified bank bond portfolio of 2-year duration: USD 6%, EUR 3%, GBP 5%.
  • Japanese yen: The JPY is extremely undervalued, close to a 30-year low. A change in BoJ’s monetary policy could trigger a re-appreciation of 10% to 15%.
  • Nuclear energy: We believe the nuclear sector will be instrumental in the world’s decarbonization efforts. To achieve fossil fuel reduction targets, the nuclear power industry’s safety standards need to be brought to the next level, for instance by using new technology to recycle uranium. New “green” nuclear energy is the number one priority of President Macron in France, while being high on the agenda in the US and China, which will build 150 nuclear power plants in the next 15 years.
  • Defense and security: The war in Ukraine has triggered massive investment in military defense and the overall security sector – including cyber, food, energy and semiconductor supply security – in Europe and around the world.