LONDON, Jan 31 (Reuters) – From equities to government bonds, markets had one of their best starts to the year in decades, but how long the run hinges on a Goldilocks scenario of a slowing economy inflation, maintaining economic growth and lower borrowing costs.
After $14 trillion was wiped from global shares in 2022, $4 trillion was added back this month. China’s easing of COVID-19 restrictions boosted Hong Kong’s Hang Seng index (.HSI) to double-digit gains, while the European Stoxx 600 stock index had its best start to the year on record.
Widespread optimism rewarded investors who took a chance on buying a US junk bond index with a total return of more than 5% this month (.MERH0A3). Shares of electric car maker Tesla jumped 44% (TSLA.O)copper prices surged and the tech-dominated U.S. Nasdaq 100 had its best January since the dotcom boom (.NDX)
At the other end of the spectrum, ultra-safe US Treasuries and German Bunds had some of their best performances in January since 2008, according to Datastream calculations. This follows tentative signs inflation has peaked and central banks will soon halt rate hikes, with markets now pricing a fair outcome of borrowing costs becoming cheaper as the world pulls back from the brink of recession.
January’s metrics are important because they reflect how investors have framed their portfolios for the year ahead, though some believe this month will mark nothing more than a wave of irrational complacency if rates continue. to increase.
“Markets are in this Goldilocks scenario of OK growth, slowing inflation and easing monetary policy,” said Richard Dias, founder of London-based investment consultancy Acorn Macro. “I don’t think it will last.”
ONE WAY TICKET?
Fahad Kamal, chief investment officer at Kleinwort Hambros, warned that January’s multi-asset rally mainly signaled investors readjusting after a too-bleak 2022, when global equity indices fell by a fifth and bond yields had their worst year in decades.
“Equities were coming off a very difficult year, as were bonds,” Kamal said. “Obviously there was an oversold feeling and we definitely had better news.”
The key risk? Inflation surprises, he added. “The market doesn’t grasp that. It thinks we’re on a one-way trip down.”
Consumer prices in the United States fell for the first time in more than 2.5 years in December, to 6.5%. Eurozone inflation also slowed, although data on Monday showed Spanish consumer prices rose in January for the first time in six months.
China’s reopening ignited other buy signals around the world, triggering rallies for the Thai baht, Brazilian real and Australian dollar. Emerging market debt issuance also had a record start to the year.
Gas prices in Europe also dipped helpfully, easing fears of a deep recession there. The slowdown in business activity in the United States has also eased.
“I wouldn’t say all the green lights are flashing,” said Michele Morganti, senior equity strategist at Generali Investments, “but the outlook is fundamentally better than it was a few months ago.”
GOLDEN BUCKLES AGAINST BEARS
Still, Goldilocks’ outlook for inflation and cooling interest rates as the global economy heats up a bit could be a fairy tale, some investors say.
To date, major central banks have added nearly 3,000 basis points to global borrowing costs in this tightening cycle.
And if they become less worried about recession and more determined to get inflation under control, which remains well above target levels, “monetary policy will remain tight,” Acorn’s Dias said.
Artemis bond fund manager Juan Valenzuela warned that low-risk government bonds and riskier assets, such as stocks and junk bonds, are unlikely to continue to rally tandem.
“We had a monumental rally in government bonds based on expectations that we’ve peaked in interest rates,” he said.
“If global aggregate demand is much stronger [than expected] it will support inflation,” he warned. “So both markets can’t be right.”
Reporting by Naomi Rovnick and Marc Jones in LONDON and Yoruk Bahceli in AMSTERDAM, Graphics by Vincent Flasseur; Editing by Dhara Ranasinghe and Sharon Singleton
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