Unsettled end of the year

Both the stock and bond markets came under pressure again in December. Rising key interest rates in the USA and the euro area depressed prices on the stock exchanges and caused bond yields to rise further. In addition, the abrupt departure from the zero-covid strategy in China surprised the majority of market participants.

Most stock markets developed negatively in December. The German DAX stock index fell -3.29%, slightly less than the broad European Stoxx Europe 600 index, which lost -3.44%. In the USA, the S&P 500 lost -9.38%. Only Hong Kong's Hang Seng Index performed positively gaining 2.50%. Overall global equities, as measured by the MSCI World Index, declined -7.88% - all index figures in euro terms.

In December falling energy prices in particular caused inflation rates to decline. Inflation in the euro zone fell to 9.2% year-on-year (November: 10.0%). Experts had only expected a decline to 9.7%. Also in the USA inflation fell for the fifth month in succession in November dropping to 7.1% (October: 7.7%). This means that inflation on both sides of the Atlantic is still well above the 2.0% target set by the European Central Bank and the US Federal Reserve (Fed). However, the noticeable easing of inflation enabled the central banks to soften somewhat their very aggressive monetary policy in December with several interest rate hikes of 75 basis points. Both the ECB and the Fed raised key rates by "only" 50 basis points, which was largely expected. In the USA the key interest rate is now in a range of 4.25% to 4.50% and in the euro area at 2.50%. However both central banks announced further interest rate steps for 2023. On average, most market observers expect smaller interest rate steps and a key interest rate level of 5.10% in the U.S. and 3.50% in the euro zone by mid-2023.

The abrupt end of the zero-Covid strategy of China surprised the markets. Independent estimations now suggest that there are around one million new infections and over 5,000 deaths per day. In the short term China's turnaround with regard to its Corona policy will have a negative impact on the economy, for example through declining figures for consumption, new orders and a weaker purchasing managers' index. China's manufacturing sector is facing short-term disruptions in production and demand as well as labor shortfalls triggered by the rise in Covid cases. Beyond China market participants are concerned that global supply chains could again come under stress. However, China's economy is expected to pick up significantly - probably in the second quarter - because of the opening up after an initially difficult phase providing positive impetus for the global economy.

In Germany the business sentiment brightened in December. Both business expectations and assessments of the current situation, which together make up the ifo business climate index, rose, with the result that the index increased to 88.6 points (November: 86.4). However, the ifo Business Climate Index is still well below its historical average of 96.7 points (since January 2005).

Bond markets remained under stress in December and acknowledged the further rise in key interest rates with higher yields across all types of bonds. 10-year German bunds yielded 2.57% at the end of December, 64 basis points higher. Yields on their U.S. counterparts increased by 27 basis points to 3.87%. As the yield curve is inverted in both the U.S. and Germany, i.e. yields of 2-year bonds are higher than those of 10-year bonds, most economists continue to expect a recession. Despite rising interest rates the gold price was able to benefit from continued high uncertainty among market participants and rose from USD 1,768 to 1,824 per fine ounce.


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