2022 was a tumultuous year for the global markets. We've seen equities crashing $14 trillion (Reuters), the US bond market was the worst year on record (CNBC), and global currencies fluctuating. Here, I outline some of the major market movers of 2022.
1) Russia-Ukraine War
Russia and Ukraine supply oil and other commodities to other countries. The war reduced the supply, causing a spike in commodity prices, most notably oil. This fueled the fire of rising inflation. Thankfully, it was reported that a warmer-than-average winter resulted in lower demand for fuel for heating, preventing an exacerbation of oil prices. I think this will fuel the transition to alternative sources of energy like coal and (hopefully) other greener sources.
2) Global Inflation and Recession Fears
Factory closures in 2020 and the energy crisis in 2022 reduced supply while demand increased. Shipping costs also rose - shipping and oil companies get windfall profits because of the higher prices (see CMA CGM and Shell). The Federal Reserve expected inflation to be transitory, but it hit a record high of 9.1% in June 2022, and the Fed is still fighting it today. Interest rates went up by 25bp to 4.75% yesterday. Other central banks started raising rates later (Fed started raising rates in March 2022) on fears of an economic recession. ECB only started raising rates in July 2022, while BoE raised rates aggressively from 0.50% to 3.50% within a year, the highest in about 14 years since the GFC.
3) China's Zero-Covid Policy
Although now abandoned, the policy that ended in December 2022 had some repercussions. People could not travel, and economic activity was sluggish due to port, factory and highway closures (Santander). With China being the second biggest economy globally, reduced economic activity in China rippled through to the global markets.
What that means for the asset classes
1) Equities
S&P reported its worst performance (-19.4%) since the GFC in 2008, and DJI returned -8.9% (Reuters). Among them, tech was down significantly, with Amazon, Tesla and Meta down 51%, 68% and 66% (CNBC).
2) Bonds
Bonds usually do well in a risk-off situation when people switch from equities to bonds for more safety. However, with the recession and interest rate hikes in 2022, bond prices and yields were hit left and right. With the rate hikes, bond prices fell, causing the "biggest spike" in the US 10-year Treasury yield since 1788 (Barrons). BoJ and its Yield Curve Control policy is a big topic. We've seen the BoJ controlling their 10-year rates at a strict 0%, which caused investors to jump to other bonds with higher yields and BoJ buying back bonds to maintain the 0% level. This would affect the yen.
3) Currencies
Yen depreciated against the dollar due to the difference in interest rates between US and Japan, which would have adverse implications, especially on inflation (happening now). On the European side, the euro fell to match the dollar for the first time in 20 years (see my blog post here).
4) Commodities
Oil prices increased due to the war, but decreased on fears of an economic recession leading to lowered demand. China's Zero-Covid policy was also an attributing factor. Supply of soft commodities was also reduced as Russia and Ukraine were major producers of crops, leading to higher commodity prices and inflation. This caused a spike in prices in 2022 (Trading Economics). Reduced gas led to higher take-up of coal.
Just like the rooks, bishops and knights on the chessboard, major market movers like inflation, interest rates and war change the economic landscape. I believe that we can become better "big-picture thinkers" of investing by being cognizant of how these pieces intertwine and affect each other.
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