Daily Market Commentary 2nd January 2023

Markets closed out the final trading day of the year on a low, with equities closing lower and finishing a dreadful year on a negative note. The year has been dominated by losses in equity markets, as global Central Banks (lead by the Federal Reserve) worked to combat rampant inflation. Profligate fiscal deficit/debt spending is at the heart of the inflation problem, only exasperated and inflamed by an energy crises, created through green energy policies and Western sanctions imposed on Russia for the war in the Ukraine. Equities have been in bear market territory and Western Economies are in a recession, only set to get worse in 2023. The good news is energy prices are stabilising and inflationary pressures appear to be easing. Inflation and energy prices need to continue to improve for a deep recession to be avoided, especially in Europe. Fiscal integrity will not be restored, ensuring inflation will remain a drag on economic growth, for the year to come.

The New Year will bring hope and promise and perhaps the chance of a new environment, free of Covid restrictions, supply chain issues and war? The US Dollar experienced strong gains throughout 2022, As the Federal Reserve led the charge in the war on inflation. Inflationary pressures may ease in 2023 and interest rates should therefore peak, offering a more positive economic environment for the second half of 2023. This is all dependent on a solution to the Ukraine war and an easing in the energy crises. Markets will open the first trading week of the year focused on inflation and growth. The first week also will look closely at US employment, with the release of the all-important Non-Farm Payrolls. The EUR closes out the year trading around 1.0700, while the Yen has shown some recovery following Bank of Japan movement on monetary policy late in the year, rising to 130.75.

Commodity currencies have suffered a stronger reserve, despite strong commodity demand and prices, with both the AUD and NZD falling around 7% for 2022. The coming year will be an interesting one and largely dependent on the actions of Central Banks. The RBNZ has been aggressive in their monetary policy, raising rates consistently, while the RBA has worked to protect the economy, with a far more circumspect approach. The AUD will close the year out around 0.6800,while the NZD holds above 0.6300. Inflation and interest rates remain key.