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Archinomics Monthly - December 2022

one year ago



Global stocks slid as sentiment was knocked by central banks’ hawkish statements. US equities were among the weakest performers (S&P 500 Index -5.9%; Nasdaq Index -8.7%) as growth-focused stocks were hurt by fears of higher rates. Japanese equities lost 4.7% (TOPIX Index) following the Bank of Japan (BoJ) policy change. However, shares in China and Hong Kong bucked the weaker trend as they were supported by Beijing’s relaxation of Covid 19 restrictions and hopes of economic reopening (MSCI China Index +5.2%; Hang Seng Index +6.4%).


Global bonds weakened, as hopes that central banks would become more dovish were dashed by comments from key policymakers. The 10-year US Treasury bond fell 1.1% as yields rose modestly to close December just above 3.8%. Meanwhile, the 10-year German Bund dropped 4.4% as yields rose sharply to just below 2.6% on hints from the European Central Bank (ECB) that further substantial interest rate hikes were likely. Corporate bonds also fell, although they held up better than government bonds.


The Japanese yen rebounded sharply after the BoJ amended its yield curve control (YCC) policy to allow Japanese government bond yields to rise. The euro also strengthened as the ECB indicated that at least two further 50 bps rate hikes were likely in early 2023. In contrast, the US dollar weakened as further signs of a peak in US inflation led to speculation that the US Federal Reserve (Fed) might dial back the pace of future rate hikes. The British pound also came under pressure amid fears that the UK was set for a prolonged recession. 


Oil prices recovered from some initial weakness to close the month little changed at $85.9 a barrel. European natural gas prices declined on news that European gas storage facilities were more than 80% full, despite a bitter cold snap, thanks to imports of LNG, an increase in German wind power and greater nuclear generation in France. 

Market Volatility

Market volatility

Volatility rose modestly, with the Vix Index rising to 21.7 in December. A reading below 20 is widely viewed as an indicator of market stability. 

Responsible investing

The 2022 United Nations Biodiversity Conference agreed a landmark deal aimed at safeguarding biodiversity. The deal will protect a third of the planet for nature by 2030. There will also be targets for protecting vital ecosystems such as rainforests and wetlands and the rights of indigenous peoples.


China pivoted away from its zero-Covid policy, with the authorities refocusing on consumption and industries such as technology and property. Infection levels surged as testing and quarantine requirements were removed. With estimates that up to 50% of citizens in major cities are infected by the virus, further supply chain disruptions are expected.

Inflationary pressures continued to ease, helped by a fall in factory gate inflation and lower shipping costs. While central banks dialled back their rate increases in December, they indicated that further rate rises were nonetheless to be expected, warning of higher terminal rates than the market has currently priced in.

The Bank of Japan amended its yield curve control policy, allowing the yield on the 10-year Japanese government bond to trade in a range of +/- 50 basis points (bps) around zero. Japanese bond yields surged to the top of the trading range following the announcement. The BoJ claimed that its ultra-loose monetary stance remains in place, with interest rates still at -0.1%.


on the

China’s healthcare system is under immense strain as the Omicron variant rips through an underprotected population. High infection levels could supress growth as factories shut and people stay at home, although the longer term picture is more positive. The Lunar New Year holidays could bring further challenges.

Central banks remain hawkish. While the ECB still has some catching up to do, the Fed’s more aggressive approach means it could be nearing its terminal interest rate. With inflationary pressures easing and high base effects soon to impact headline inflation rates, investors will be watching Fed policymakers closely for any change in focus.

After the worst year for equities since the financial crisis, as growth-focused companies lagged value stocks by more than 20% over the year, investors will be closely watching the forthcoming reporting season. The slowdown in the global economy could negatively impact earnings growth.


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