Spencer Maynard Wealth Management No Comments

Global Equities delivered a second consecutive month of positive returns in November; erasing more of the falls experienced earlier in the year. The November rally was led by the Emerging Markets, with Chinese equity delivering particularly strong returns. The positive returns have been driven by signs that bond yields might be peaking, and favourable announcements made by the authorities in mainland China, such as relaxation of a COVID-19 related restrictions and support package for the property sector.

November brought a wave of cautious optimism in developed bond markets on the back of a US CPI undershoot and more dovish Fed commentary. The Fed and The Bank of England both increased rates by 0.75% over the month. UK bond markets were supported by the fiscal consolidation set out in the Autumn statement, bleak OBR forecasts and economic indicators such as PMI pointing towards an economic contraction. Eurozone yields also fell over the month, and German-Italian spreads narrowed as the market became less cautious on risk.

In emerging market debt, China was the big story, with the market anticipating a potential re-opening. This led to a “risk on” move, causing bonds to sell off. Poland was another big mover, with some central bank members indicating that an economic slowdown and tighter money supply could allow for potential rate cuts.

Currency Exchange (FX) markets also moved risk-on during the month, with the dollar falling against most major currencies. The improvement in risk appetite, lower energy prices, and better-than-expected Eurozone economic data supported the euro, which jumped 5.3% against the USD in November. GBP also benefited from USD weakness, supported by an improvement in risk sentiment and a new fiscal plan.

We have likely reached peak central bank hawkishness as headline inflation rates begin to cool and given the extent of tightening so far. We expect a further 0.50% of Fed rate hikes in 2022, and some modest additional tightening in Q1 2023. This may reverse later in 2023 if the economy tips into significant recession. Meanwhile, the European Central Bank is expected to continue to hike rates in order to manage inflation expectations. On the fiscal front, limiting the effects of the energy shock will be a primary concern in Europe while in China, support may come in the form of increased infrastructure investment.

US and European recessions in 2023 look increasingly likely given tighter monetary policy and the household income squeeze, although milder weather has helped limit the impact of the energy shock to activity.

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