After a year of economic and political shocks, December was pretty uneventful in comparison. But the problems of 2022 (which go back even further) are as yet unresolved, and make for a gloomy backdrop for 2023. There has been no respite in the cost of living crisis and the Ukraine war is no closer to a resolution. Industrial action across a number of public services has created significant disruption as workers demand fair pay. The UK is now firmly in recession, with short-term growth prospects looking bleak.
We must remember that everything is cyclical. We have seen all of this before, although not necessarily all at the same time. Things will improve eventually, it is simply a question of when.
Inflation and Interest Rates
The Retail Price Index is currently sitting on an annual increase of 14%, while the Consumer Price Index has risen by 9.3%. Regardless of which ‘basket of goods’ we use to measure inflation, costs are still spiralling out of control.
Central banks across the world have taken action, with increased interest rates being the main outcome. The Bank of England, Federal Reserve, and European Central Bank all pushed rates up by 0.5% in December. While the pace of increases has slowed from initial predictions, they are all still in agreement that cooling inflation is the top priority.
The strategy has started to pay off in the US, as consumer price growth slowed to 7.1% in November (from 7.7% in October). This is the lowest increase since December 2021. The Nasdaq and S&P 500 both saw a brief bounce following this news, with other global markets following shortly.
Given the size and global reach of the American market, trends which start there tend to have a worldwide impact. If the situation in the US is starting to ease, there is a good chance that the rest of the world will shortly follow.
Energy and Alliances
Europe has been reliant on Russian gas supplies for many years. However, in the wake of the Ukraine war, alternatives are being sought.
Germany has recently signed a 15-year deal with Qatar to import liquid natural gas (LNG). Other European countries are also in talks with the Gulf state. Of course, the Russian crisis has shown us there are risks involved in relying so heavily on another country for energy, particularly where there are political or ideological differences. Qatar has been in the spotlight recently due to the World Cup, and concerns have been expressed about the country’s track record on human rights. Qatar has also expressed dissatisfaction about the handling of corruption in the European Parliament.
However, Qatar is also known for not bringing politics into its business arrangements, which suggests that at least some of the risk is mitigated.
The solution would be for Europe to become more energy-independent, but of course, that is easier said than done. Renewable energy is not yet at a point where it could bridge the gap left by imported oil and gas.
The UK has recently approved a new round of exploration to increase its own supply, independent of imports. But the recent tax increase on energy companies’ profits mean that fewer companies are willing to work on the projects.
Has Crypto Run Its Course?
Crypto was a key trend in 2020 and 2021 as digital currencies soared. This opened conversations about the potential for decentralised currency and whether it was a genuine diversifier against mainstream investments.
Crypto is in the news once again, with the collapse of crypto exchange FTX and the arrest of its founder, Sam Bankman-Fried, for wire fraud and money laundering, amongst other charges.
This has impacted confidence in the sector, with falling prices and the collapse of several other crypto companies. The lack of regulation, and blurring of the lines between client money and company assets, mean that crypto investors are exceptionally vulnerable to fraud, mismanagement, and the amateurism which appears to be rife in the sector.
The UK Market
The UK All Companies sector has dipped by 1.5% this month. The losses have been weighted more towards medium sized companies, as the FTSE 250 has dropped by 3.6%, while the more heavily weighted FTSE 100 has lost 0.2%.
The Global Outlook
The US market has dipped by 4.7% overall during December, despite mid-month rallies on the back of cooling inflation data. The drop can be seen across the main indices during the second half of December. This appeared to be fuelled by ongoing concerns about inflation and rising interest rates, which would increase the cost of borrowing for businesses.
The Eurozone remains impacted by the war, rising costs, and energy shortages, and has dipped by around 1.6% tin December.
Japan, a typically fairly uneventful market, surprised the financial world in December by increasing the fluctuation cap on bond yields. Previously, yields on long-term bonds could fluctuate between -0.25% and 0.25%. This has now increased to 0.5% on either side. While it sounds minor, it has led to a sell-off in Japanese bonds and ripples across the world. While the Japanese equity sector has seen some losses in December (1%), the currency value has increased relative to the dollar.
China has started to move away from its zero Covid policy, which has led to optimism in the market. However, it still faces challenges as infections increase and the country recovers from economic slowdown. Overall, the Asia Pacific market has remained level in December.
The value of investments can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance.
The content in this article was correct on 06/01/2023.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on savings, pensions, investments, mortgages, protection and estate planning for teachers and non-teachers. The Financial Conduct Authority does not regulate estate planning.
Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.