Markets development - opportunities and challenges

I think markets have been evolving especially rapidly in the past few years since the onset of Covid. The various major market movers include Covid, the Russia-Ukraine war and China's now-abandoned Zero Covid policy (2022 markets wrap up here). These 3 major market movers have resulted in inflation in the majority of the world, from the US at 9.1% in June 2022, to Eurozone at 9.2% and Japan at 4% in December 2022. This is because of the supply crunch from factory and port closures in the last few years, coupled with the reduced commodity supply from Russia and Ukraine. Reduced supply of such commodities resulted in a spike in prices, driving up inflation. 

Central banks around the world are struggling to balance the impossible trinity - tackling inflation or generating economic growth or keeping to a target exchange rate. Notably, the US started the fight against inflation by raising rates in March 2022, as opposed to the ECB which started only in July 2022 because of recession fears. Several indicators point toward a drop in inflation in the US, except for the strong nonfarm payrolls last week, which delayed expectations of rate cuts from 2023 to 2024. Besides employment, the US savings rate has dropped to only 3.4% in 2022, and 47% of them make more than 6 figures a year (Yahoo). Thus, while prices are increasing, I think that people are perhaps sticking to their usual lifestyle more so than reducing spending, which will prolong inflation for a bit longer. On the east side, eyes are on BOJ's new governor to steer their Yield Curve Control policy which will have implications on the Japanese yen and global Japanese-owned assets. 

While market expectations have soured slightly, I think it is currently a risk-on environment, and commodities like iron and oil present opportunities, especially with China's reopening. Bond yields are expected to fall, so it would be good to hold on to high-yield investment-grade ones like US T-bills and Singapore's SSB, while we should remain cautious toward junk bonds like distressed debt, given the current economic environment. For currencies, AUD is expected to rise with its anticipated upcoming rate hikes, while JPY might not rise as much as expected because of the uncertainties surrounding the new governor.