Buoyant start to the year

Declining inflation rates and China's departure from its "zero-covid strategy" made market participants confident on both the equity and bond markets in January.

Most stock markets recorded a positive development in January. The German DAX index closed +8.65%, slightly higher than the broad European Stoxx Europe 600 index, which gained +6.67%. In the USA, the S&P 500 rose +4.67%. Hong Kong's Hang Seng Index also performed well, gaining +8.34%. Overall, global equities, as measured by the MSCI World Index, rose +5.49% - all index figures in euro terms.

The positive start into the year was based, on the one hand, on China's surprising complete departure from its "zero-covid policy" and, on the other hand, on a strong decline in energy prices, which supported the outlook for Europe in particular and ensured declining inflation rates in both Europe and the USA. In January, inflation in the euro zone fell to 8.5% year-on-year (December: 9.2%). In the USA, too, headline inflation is likely to have fallen more sharply in January. Estimates currently put it at around 6.2% (December: 7.1%). However, this means that inflation on both sides of the Atlantic remains well above the ECB and FED target of 2.0%.

Due to the sharp drop in inflation, there were growing expectations that the central banks would abandon their previous course of hefty interest rate hikes. However, both central banks had recently made it clear that further interest rate steps were still on the cards for 2023 in order to further combat inflation.

The sudden U-turn in China's Corona policy is expected not only to boost Chinese economic growth significantly, but also to provide positive impetus for the global economy. In Germany, the upward trend in business sentiment continued in January. Both business expectations and the assessment of the current situation, which together make up the ifo Business Climate Index, improved, with the index rising to 90.2 points (December: 88.6). The German economy thus started the new year on a more confident note.

A slowdown in inflation momentum gave a boost to the bond markets. 10-year German bunds yielded 2.28% at the end of January, 15 basis points lower. The yield on their US counterparts fell by 36 basis points to 3.50%. With the yield curve in both the U.S. and Germany still inverted, i.e., 2-year bonds yielding more than 10-year bonds, most economists continue to expect a recession, especially with regard to the U.S.. The gold price was able to profit despite a rising interest rate level and rose from USD 1,824 in the previous month to USD 1,928/troz.


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