As we emerge out of a rough year dominated by soaring inflation, slowing global growth, heightened geopolitical risks and Covid-19, the early part of 2023 looks like it could be more of the same story.

Financial markets were hit by negative market themes in 2022, with the S&P 500 shedding almost 20%. We also witnessed the dollar experience a sharp change of fortune during the fourth quarter after dominating the FX space for most of the year. Even cryptocurrencies were treated without mercy, including Bitcoin which depreciated by 64%!

The harsh reality is that markets and investors across the world have accepted the idea of a global recession in 2023. Financial heavyweights like the IMF and World Bank have all lowered their world growth forecasts amid the uncertain outlook. The United States is expected to sink into a recession while things remain gloomy for China due to surging Covid-19 cases. On top of this, Britain may already be in a recession along with the Eurozone as they pay the expensive price of taming inflation.

Beware of China Covid threat…

2023 may kick of on a cautious note as countries across the globe express unease over China’s growing Covid-19 threat. The Covid menace has torn through the world’s second largest economy after the government’s decision to relax its zero covid policy back in early December. With cases exploding in China, countries such as the United States, Italy and Japan among others have announced mandatory tests for Chinese travellers. Regardless, the threat of infections spreading across the world and resulting in disruptions may weigh heavily on sentiment as painful memories of 2020 & 2021 resurface.

Inflation beast tamed?

Has inflation truly peaked? This is the 20 trillion-dollar question and a central theme that will influence global financial markets in the new year. It is worth keeping in mind that US inflation slowed for a fifth straight month to 7.1% in November, the lowest level since December 2021. We saw a similar pattern in the United Kingdom, Europe, and China among other countries across the globe. Should consumer prices continue to cool well into 2023, this may set the stage for a series of major developments that impact currency, commodity, and equity markets.

Will Central Banks be forced to pivot?

Persistent signs of cooling inflation could encourage central banks to slow down their pace of hikes, pause, and then eventually start cutting interest rates by the end of 2023 to promote growth. Despite concluding the year on a hawkish note, the Federal Reserve has already shifted into lower gear on rates, hiking by only 50bps in December. We saw the same development with the Bank of England who concluded their last policy meeting of 2022 by slowing the pace of rate hikes. It may be wise to keep a close eye on the Bank of Japan (BoJ) which sent shockwaves across markets in December by tweaking its monetary policy. This fuelled speculation around a hawkish policy pivot down the road – ultimately boosting the Yen. Should the BoJ pivot from ultra-dovish in 2023, Yen bulls could dominate the scene.

USD: Even the mighty fall

King dollar could be in store for further pain in the New Year as fundamental forces work against the world’s reserve currency. During the final quarter of 2022, the dollar weakened against every single G10 currency as cooling inflation reduced the pressure for the Fed to remain aggressive on rates. Concerns over the US economy along with falling Treasury yields left the currency unloved and depressed. Dollar weakness has the potential to become a key theme in 2023 as rate hikes slow and eventually become rate cuts in the face of cooling inflation.

A vulnerable dollar should provide an opportunity for G10 and emerging market currencies to fight back after many months of oppression. Although each currency will have its domestic trials to overcome, a depreciating dollar could provide a breath of fresh air, creating potential reversals across currency and commodity markets.

The Euro’s great rebound

Since we are talking FX, how can we leave out the most popular and liquid currency pair? After dipping below parity in 2022, EURUSD has staged an impressive rebound. Upside momentum remains powered by a weaker dollar which has taken prices back above 1.0600 after sinking as low as 0.9535 in late September. However, with both the ECB and Fed shifting into different gears on rate hikes, things could get choppy in the medium term. Should geopolitical risk and the energy crisis in Europe remain a major theme, this could cap EURUSD’s bullish momentum. However, further dollar weakness could propel the pair to levels not seen since 2021.

S&P 500 to experience major reversal?

Things could become even more interesting for global equity markets as shifting fundamental themes influence sentiment. In 2022, stock markets were a battleground with the S&P 500 concluding almost 20% lower thanks to rising interest rates and growth concerns. Equity bulls could fight back with a vengeance in the second half of 2023 as slowing inflation encourages central banks to pivot. Any signs of rates being cut down the road could sweeten appetite for stocks, with the S&P500 and Nasdaq among others experiencing bullish reversals. Falling interest rates would offer consumers some relief, by encouraging spending and investment, and ultimately stimulating economic activity. Looking at the technicals, the S&P 500 remains in a bearish channel on the monthly charts. A solid breakout above 4,300 could open a path back to towards the all-time high at 4,819.5.

Watch out for 2024 presidential buzz

We expect some buzz around the 2024 US presidential elections, especially after Donald Trump announced his presidential bid, “In order to make America great and glorious again”. The news flow around the US elections may intensify with every passing quarter, translating into bursts of volatility across global financial markets. With Elon Musk reinstating Trump’s account on Twitter in November, the former President’s tweets have the potential to influence markets. In the past, price action has displayed high sensitivity to Trump’s tweets and history could repeat itself as the focus slowly turns to the 2024 elections.

Oil markets battleground for bulls & bears

Looking at commodities, it could be a volatile year for oil if the supply and demand dynamics clash. OPEC expect to see robust global oil demand growth in 2023 with potential economic upside coming from a relaxation of China’s zero Covid policies. Indeed, back in December, the world’s largest energy consumer issued new guidelines lifting its most severe Covid policies. To global investors, these guidelines represented a fresh of breath air and offered hope for strong future China demand. On the supply side, the European Union has capped Russian crude oil in an attempt to limit its earnings, ultimately impacting Moscow’s budget. Given how this could have uncertain effects on the price of oil as concerns over lost supply through the price cap clash with lingering fears over gloomy demand outlook, volatility may become a major theme. Interestingly, both brent and crude concluded 2022 higher, will the story be different in the New Year?

Watch out for gold!

Gold could be one of the biggest winners in 2023 as cooling rate hike bets hit the dollar along with Treasury yields. Possible geopolitical flare-ups and concerns over world growth could stimulate appetite for the zero-yielding metal. If Chinese economic growth improves, this could also boost consumer demand, adding to the growing list of positive themes supporting gold bugs. After ending 2022 practically flat, gold has the potential to shine with the fundamentals potential elevating prices towards the psychological $2000 level.

In a nutshell…

The overall outlook for 2023 may heavily depend on the interaction between inflation and central bank intervention.  While other fundamental forces and themes are expected to influence global sentiment, if central banks successfully tame the inflation beast, the worst could be behind us.