Investments, the year that was and what will come. Markets and stock exchanges on a leash by central banks (and vice versa?) – Il Fatto Quotidiano

What is closing was a very difficult year for the markets, the worst since 2008. Investors hardly had a chance as the declines affected all sectors to a certain extent, an uncommon circumstance. In the United States shares are in arrears of 20% (S&P500 index) and the bonds are down 17%. In Europe the music was not much different. Frankfurt lost 13% as well as Milan, Paris 10%. London was saved which stores the 12 months on the same values ​​with the beginning. Government bond prices have fallen and yields (fixed in absolute value but expressed as a percentage of the share) increased. In Asia the Japanese stocks fell 11%, that of Hong Kong by 15%. After more than a decade of ultra-expansive policies with interest rates at zero, or even negative, the major central banks (Federal Reserve, European Central Bank, Bank of England and Bank of Japan) have initiated a change of course. Who before, who after the monetary tightening was initiated or at least announced (Japan). In March the Fed started to raise rates which have now reached 4.75%, the highest level since 2014. The ECB moved later, the hikes started in July and the cost of money in Europe is now at 2.5%. The time lag is the basis of the fluctuating trend of the relationship euro-dollar. The European currency ends the year with a drop of almost 6% to 1.06 dollars but during the summer, and until November, the euro slipped below paritywhat that It hasn’t happened for 20 years. Among the few currencies that have gained in the exchange rate with the greenback are the brazilian real (+5.5%), the Mexican peso (+5.3%), the Peruvian sol (+4.9%) and the Russian ruble (+3.3%).

When rates are low and central banks buy huge quantities of government bonds and bonds on the markets (quantitative easing) there is more money out there that needs to be invested. This tends to push up the value of all assets, from houses to stocks or cryptocurrencies. In recent years there have been warnings about bubble risk that the abundance of liquidity would have produced on the markets. Above all, the stock exchanges had become so accustomed to these conditions that they sank into heavy declines every time the central banks hinted that they wanted to suspend or reduce their quantitative easing operations. “Infinity QE”, the infinite Qe, the most attentive analysts have renamed it, that is, a practice that once started becomes almost impossible to stop without causing disruption. The Fed had tried it in 2018 by causing a “mini crash” of the lists and therefore reversing. Then Covid froze things. However, now the monetary authorities are under pressure from inflation back in the 10% area both in Europe and in the United States. Raising rates is one of the ways to counteract the phenomenon and central banks are forced to choose between the lesser of evils. Or at least they try.

If we consider the levels of geopolitical tension reached in some phases following the Russian invasion of Ukraine i markets have shown a more than sober attitude. The “apocalypse risk” that has hovered in a worrying way in some situations does not seem to have ever been seriously taken into consideration by investors and incorporated into prices. Wisdom, unconsciousness or dependence on “monetary drug” that obscures reality? In the latter case, we would have confirmation of how tangled the skein is that central banks are trying to unravel.

The cases of the year, Big Tech, Tesla and Credit Suisse – In the electric car of Elon Musk the light went out. The company’s shares lost 70% of their value over the year. The valuation of the title was particularly pushed and was affected by the drop in the general index (Nasdaq minus 33%) but the company also suffers from the dedication of its founder to the new cause: Twitter. The social network was bought by Musk last October for 44 billion dollars and for now it only seems to have absorbed resources, forcing the entrepreneur to sell slices of his shares in Tesla, accentuating the decline. At this rate, the one between the two companies risks proving to be a suffocating embrace.

At the beginning of October in Zurich, headquarters of the banking giant Credit Suisse, got into a cold sweat. On the group, in difficulty due to the huge losses accumulated with the collapses of Greensill and Archegos, uncontrolled rumors of serious and imminent problems have gathered, creating an alarm that has triggered a massive wave of divestments risking bringing liquidity below regulatory levels. The mini “bank run” stopped but the group was forced to launch a capital increase of 4 billion Swiss francsconcluded on 8 December, and subscribed mainly by Middle Eastern investors. 2022 ends for the bank with a loss of the stock market value of 68%.

It was hard for them too, the giants of the web who had grinded profits and stock market increases in recent years. After the Covid effect, with the lockdowns favoring online purchases and activities, profits began to slow down and prices to fall. In a year Amazon cut its value in half losing about 900 billion of capitalization along the way. Alphabet (Google) lost more than 30%, Meta (Facebook) even 62% with the visionary metaverse project struggling to get off the ground. They did a little better Microsoft and Apple they close anyway the year to – 25%.

The Ice Age of Cryptocurrencies – It’s a bad world out there. The encounter with reality has also arrived for digital currencies which have been discovered to be subject to exactly the same laws that govern other financial products. Specifically to the moods of central banks. Bitcoin closes the year around $16,500 with a 65% loss in value. Ether fell 68%. As if that weren’t enough, autumn brought with it the bankruptcy of FTP platform and of the associated Alameda managed with fraudulent practices by the founder Sam Bankman-Fried. Cryptocurrencies were born and established after the great financial crisis of 2008, proposing themselves as an alternative monetary payment system to the traditional ones. But they have never really managed to establish themselves in this role, limiting themselves to assuming the function of speculative investment. The underlying vision is that markets areor fully capable of self-regulation and correction and do not require regulators and external interventions. For now, no one’s law has seemed to be more the law of the fittest.

Full throttle raw materials – It was the year of gas, the real star of the commodities with its crazy prices. After months of rollercoasters, prices returned to the values ​​with which the year had opened, in Europe between 80 and 90 dollars per megawatt hour. High price compared to the averages of recent years but far from 340 euros seen at the end of August. Brent oil closes 2022 with a small gain (+3%) but at the end of June a barrel cost almost double compared to last January. Copper give away to 2022 13% of its value. The red metal is the one most closely linked to the performance of the economy China, by far the main consumer, experiencing a slowdown. Among the food raw materials, wheat closed the year with a modest +1.7%, a contained increase if we consider the problems affecting the supplies from from Ukraine and good news from the point of view of the food supplies of the poorest countries. The fall in quotations should be noted of the timber (- 67%) to highlight a slowdown in demand from the construction sector.

A 2023 played in the shopping cart- The script for the new year is announced as the second half of 2022: “Central Banks vs. Markets”. The plot is simple, understand whether the Fed and the ECB will go straight on their way or not and with what speed and decision. To dictate the times it will also be the inflation data. A cooling in prices, which the latest surveys suggest, would give way to less aggressive policies or even a “pause for monetary reflection”. The markets are hoping for it, a change of attitude in Washington and Frankfurt would be greeted with an immediate recovery in the price lists. In general it seems difficult to hypothesize a return to virtually non-existent inflation we’ve been used to over the past year. China has ceased to be a global disinflationary engine, also due to its demographic evolution and relatively low cost energy we won’t see it again for quite a while.

There are unknowns that go beyond strictly economic and financial dynamics. The first is of course the war in Ukraine. It goes without saying that a relaxation of the tension would also favor a descent of the energy prices and a recovery in the climate of confidence and therefore in consumption and corporate profits. The other, perhaps even more inscrutable it’s China. In the immediate future, the country is facing a new and powerful wave of Covid infections after abandoning its policy of severe restrictions in favor of “ordinary” management of the pandemic. This occurs while the country is grappling with a complicated change in its growth model (more domestic demand and less exports and investments) and with a serious crisis in the construction sector. For what it’s worth according to a survey conducted by the agency Bloomberg among the leading global investors, 71% expect a recovery of share lists during 2023.