Global Market Commentary - February 2023
After accelerating into the new year, global markets slowed in February, as old concerns about inflation and higher interest rates resurfaced. The MSCI World Islamic Index fell by 2.6% in February, while the Dow Jones Sukuk Index fell 1.0%.
As the month began, markets remained bullish on the Fed’s eventual pivot to ending the interest rate hike cycle and possibly cutting interest rates as early as the end of 2023. The Fed fueled this early optimism with a 0.25% “dovish hike” on February 1 that slowed the pace of earlier hikes in 2022, as well as encouraging remarks from Chairman Jerome Powell that, while there was still had more work to be done, monetary conditions had noticeably tightened and the disinflationary process had begun.
As the month progressed, however, the optimism faded as payroll and employment data surprised to the upside week after week, while the January CPI reading showed inflation beating expectations. Whereas market participants had previously debated whether the hiking cycle would result in a “hard landing” or “soft landing” for the economy, they were now considering the possibility of a “no landing”, in which the economy would simply continue to grow and overheat, and higher interest rates would continue to weigh down on valuations.
By the end of February, it became clear that the market had been too quick to anticipate the end of above-target inflation and the Fed’s pivot. The S&P 500 finished the month down 2.6%, and 5.0% from its intra month peak.
Meanwhile, in Europe, the “no landing” scenario became more likely, as economists no longer predicted a recession in 2023. The main contributor to these revisions was the surprisingly warm winter, which reduced the need for energy reserves and lowered gas prices. The European stock markets, which had long been undervalued, fared better this month, with many of its key country indices trading at all time highs.
The reopening of the Chinese economy is starting to improve regional consumption and production, which has improved the outlook for its equity markets and the global markets in general. Geopolitical tensions, on the other hand, dampened market sentiment in February, as China and the US struggled to see eye to eye on allegations of spying, data security, and militarily aiding the Russia-Ukraine war.
Heading into March, a series of US economic data releases could chart the course of the markets for the next few months.
On the one hand we have a favorable technical backdrop in which the S&P 500 has been above its 200-day moving average since January and its lows have been progressively higher, both of which are signs of upside momentum.
On the other hand, the labor market remains tight, raising concerns about the persistence of inflation, especially in the services sector and potentially prompting the data-dependent Fed to hike interest rates even further and keep them higher for longer.
Therefore the US payroll, unemployment, and CPI data coming out in the first half of March, as well as how the Fed reacts, could send the markets on a sky high rebounding trajectory, or retest the market lows of late 2022 before we see any economic recession–though with lower equity valuations, lower gas prices and a reopened China as fundamental improvements since then, we believe the market is better equipped now to handle a higher interest rate environment.
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