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9 January 2023 - A happy (?) new year.

A new year and new hopes have arrived. European equities rose by almost 5% on average for the first week of the year, with France leading with 6% and the UK underperforming slightly with 3% gains. The US markets were more volatile and finished the week higher only by 1.5%, with a Friday rally saving the week. But Nasdaq and Technology continue to underperform. Chinese equities posted a decent 3% gain. In terms of sectors, the winner of the last two years, Energy, started with profit taking, falling about 1%, against the overall positive price action. The global Consumer Discretionary sector which includes the likes of Louis Vuitton, Volkswagen as well as Amazon, posted the strongest upward move with 4% gains. Overall, it was a week of hope and a stark difference with the final week of 2022.

Eurozone inflation fell more than expected in December. This was the second consecutive month of declines which shows that the peak might have been seen in the October numbers. The headline CPI fell to 9.2% on a yearly basis, almost 1% lower from the November number (10.1%) and better than expected (9.5%). Compared to expectations, the downside positive surprise was driven by a larger-than-expected decline in energy prices and a less pronounced increase in food prices. On a negative side, Core inflation rose by 0.2% to 5.2% on a yearly basis which constitutes a worrying sign of higher inflation persistence. Expectations were indeed for an increase, but to 5.1%.

The US labor market data were mixed, but the market took them positively. December nonfarm payrolls increased by 223k, a bit higher than consensus for 205k but were lower than the November's number, which was also downwardly revised to 256k (was 263k). In more "positive" news, October was also revised down to 263k from 284k. But the focus soon fell on the wages' growth, which is even more important for inflation. Average hourly earnings were up 0.3% on a monthly basis, softer than November's number which was also downwardly revised to 0.4% (originally printed at 0.6%). These numbers gave comfort to investors that wages might be cooling off, without a major deterioration in the jobs market, which is the "best-of-all-worlds" scenario: ie that of a slowdown and not a recession, but with inflation moving down.

The US inflation data for December are expected this week (Thursday). The headline CPI number is expected to show no increase on a monthly basis, which will bring the annual number down to 6.5% from 7.1% last month. The Core CPI is expected to increase by 0.3% on a monthy basis, but given the "base effect" which we have highlighted many times last year, the annual Core CPI is expected to decline to 5.7% from 6.0%.

The published FED minutes of the latest meeting showed no surprise . The members were unanimous in the view that higher rates are needed but the rate of increase will have to slowdown to 50bps or even 25bps from now on. But there was also an attempt to present a more balanced view of the possible risks, rather than sticking just to the high inflation risk. According to the minutes: "Many participants highlighted that the Committee needed to continue to balance two risks. One risk was that an insufficiently restrictive monetary policy could cause inflation to remain above the Committee’s target for longer than anticipated ... The other risk was that the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent and lead to an unnecessary reduction in economic activity, potentially placing the largest burdens on the most vulnerable groups of the population. " The risk of a recession is now being highlighted for the first time among the members and the terminal rate of around 5% to 5.25% is getting close.

Bonds also started the year on a positive note. The market concentrated again on the "peak inflation" theme after the Eurozone numbers, despite the continuous efforts by the central bank officials to speak tough. The US 10-year yield dropped to 3.55%, down from 3.85%, which translates to an almost 2% rise in price. The German equivalent yield dropped to 2.22% from 2.50%.

The USD has started the year on a weak note, sending Gold prices higher. Despite some volatility, the EURUSD is trading close to 1.0700, where it was at the end of last year. In the meantime it reached a low of almost 1.0500 in the middle of the week. Gold is approaching again the 1900$ level, but Oil prices are well below 80$ again.

The Q4 corporate earnings eason is starting this week. As usual the major banks like JP Morgan, Citigroup and Morgan Stanley are among the first to report. The market will be very keen to monitor them for signs of how the overall economy is faring, after 6 months of interest rates keep going higher, which of course is beneficial for banks' profits. The large Technology companies will start reporting in two-three weeks from now and given the recent announcements for more layoffs, one cannot be overly optimistic about the current quarter. Most importantly, in the next few weeks we will know whether the 2023 estimates will have to move further down or not, setting the stage for the next move in equity markets.

In other corporate news, Volkswagen shareholders will receive the special dividend today. The gross amount is 19.06 EUR per share, but the after-tax amount is reportedly at 14.03 EUR/ share.


Chart of the Week :

Will 2023 look like 2003 ?

We have claimed several times that the year 2022 had many similarities with 2002. And in a striking similarity to the start of 2003, the new year has also started with a strong rally. The chart above shows the global equities index (MSCI World AC) in 2003. As today, global equities rallied by about 5% in just the first two weeks of the year until mid-January, and a major sell-off occured afterwards. The low of the year was finally registered in mid-March, a typical month for bottoms. At that point the index had fallen about 15% from the start of the year. The good news is that a major rally staged afterwards and the index finally closed much higher than the January levels. The gains for that year approached finally 20% for equity investors. So a lot of caution is still warranted for the next 2-3 months, but at the end of the year we should finally be higher than today.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : KSH, Facset


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