The Tribune

By RICARDO EVANGELISTA

ActivTrades

THIS year has been a fertile one for market volatility. After decades of relative price stability, inflation returned with a vengeance, forcing a policy shift by developed country central banks and triggering interest rate hikes around the world.

The impact on investors, who had become used to years of cheap money, made them drop risk-related assets and turn to safe havens instead. At the same time, the war in Ukraine caused a commodities crisis. The shockwaves from this conflict will continue to ripple around the world, influencing the sentiment of traders well into 2023.

So, given the current scenario, what can be expected next year? Here are a few ideas on how key assets may perform in 2023.

The US dollar has been the star performer among major currencies in 2022, but the greenback’s dominance is unlikely to continue. The markets have all but priced-in the Federal Reserve’s cycle of monetary policy tightening, with the US central bank expected to take its foot off the gas in the new year. With US inflation stabilising, and other major central banks still fighting to control rising consumer prices, the dollar’s supremacy could start to fade over the course of next year.

A roller-coaster would be a fitting description for the price of gold during 2022, as it oscillated between a maximum of $2,070 and a minimum of $1,614. The precious metal has been trapped in a tug of war, with a strong dollar capping the upside created by inflation and geopolitical tensions. As we head into 2023, the Federal Reserve is expected to pivot in its rate hiking drive and the dollar is likely to soften, benefiting gold due to the inverted price correlation between the two assets. Meanwhile, geopolitical instability and inflation are unlikely to disappear from investors’ radar, potentially increasing gold demand due to the precious metal’s refuge-asset status.

Stock markets experienced a tough 2022. War in Eastern Europe, zero-COVID policies in China, inflation and monetary tightening all contributed to the significant drop in investor risk appetite, which at some point saw the S&P500 drop by 26 percent. Looking ahead to next year, many of the bearish factors that weighed on stocks have already been priced-in, so a stabilisation is expected. This is a likely scenario, but it is by no means guaranteed to happen. It all depends on whether the Fed and its peers can orchestrate a soft landing, avoiding a deep recession. The first half of 2023 will be crucial. If a meaningful economic contraction can be avoided, there will be significant upside for stocks, especially in sectors such as technology which now look underpriced after the heavy losses of 2022.

Finally, we look at oil. If there is a sector where the volatility of 2022 was especially felt, it was in the oil market. Prices rose 40 percent during the first half of the year, boosted by war in Ukraine and the post-pandemic surge in demand. However, the second half was different. OPEC, the cartel of oil producing countries, increased output to ease supply-side pressures. The strength of the US dollar also fed into lower prices, as did the situation in China, where the zero-COVID policy capped demand. All this looks set to change again. The American currency is expected to weaken in 2023, boosting the value of the dollar-priced barrel. Changes in Beijing improved the outlook for oil demand, as China finally accepted that strict lockdowns and a functioning economy cannot co-exist. With no end in sight for the war in Ukraine, the geopolitical arm-wrestling between Moscow and the West will continue to generate anxiety over supply, thus supporting oil prices. Against this background a return to the $100 per barrel level could be a realistic target.