Having survived Covid, this was supposed to be the year of opening up and returning to normality. Instead, 2022 will go down in history as a year to remember, just not for the right reasons. We have had a brutal war, geopolitical tensions, accelerating inflation and fast-rising interest rates.
Luckily, December was less dramatic than many other months, although investors may well disagree. There were signs that inflation had peaked, yet markets were still on edge, with the VIX sitting above its average (21 vs 17) but far below recent highs.
Market participants entered the month relatively bullish and risk-on, believing central bank policy was becoming more dovish. Central banks, however, soon showed that this was jumping the gun, as they maintained a toned-down hawkish approach and sought to slow down the pace of interest rate increases.
US inflation was 7.1% over the 12 months to the end of November, dropping from 7.7% in October. While in the UK, the latest inflation figure was 10.7%, down from 11.1% in November. The Euro region likewise dropped to 10% in November from 10.6%.
On 14 December, the Fed hiked interest rates by 0.5% to a targeted range of 4.25% and 4.5%, the highest in 15 years. Officials expected to keep rates higher in 2023, with no reductions likely until 2024. Similarly, the Bank of England raised rates to a 14-year high of 3.5%, warning that further rates are on the horizon.
According to the Centre of Economics and Business Research, global recession remains on the cards for 2023. The Centre puts this down to ongoing inflation, with 'the battle ... not won yet [and] central bankers [sticking] to their guns in 2023.'
The UK economy is still in no man's land, with the ONS revising down growth figures in the third quarter, which saw a contraction of 0.3%, against estimates of 0.2%. The expectation is that the UK will fall into recession in the fourth quarter.
It has now been almost ten months since Russia invaded Ukraine. This war has been a disaster on many different levels, setting off a chain of events that has adversely hurt what was already a fragile global economy. Russia's 'armageddon' rhetoric may have calmed down in recent months, but there is still little indication that it will pull back or seek peace. There remains a worrying stalemate during the winter, with neither side making significant gains.
A positive sign was China reopening, as it cancelled the zero covid policy. The latest action was the removal of its in-bound quarantine rules. China, however, remains joined at the hip with Russia against what they see as a Western axis against totalitarianism, with Putin expecting Xi Jinping to make a state visit in the new year.
For much of the month, markets were more risk on than off, yet still closed the month in negative territory. This has been a particularly unsettling year and investors by year-end were looking to move on, becoming gun-shy and worried about taking on too much risk.
The Nasdaq, in particular, was hard hit, falling -8.7%, followed by the S&P 500, -5.9%, taking the year-to-date figures to -30% and -16.1%, respectively. Looking beyond the US, most indices were heavily down, with the Dax down -3.3% and Nikkei 225 -6.7%, taking their year-to-date figures to -13.1% and -10.9%, respectively. The best performing index during the year, due to its heavy oil and gas weighting, and despite the British political shenanigans, was the FTSE 100, which closed the year down only -0.7%, having fallen -1.6% in December.
Even with the price cap to curb Russian oil, there was little movement in oil markets. Brent rose +0.6% and WTI fell -0.5%. At the OPEC meeting, there was no change to the status quo. More broadly in commodities, there were reasonable moves in precious metals, with silver +7.5% and gold +3.3%, both boosted by the weaker USD, expectation of a Fed pivot and high demand, particularly for gold.
In this topsy-turvy environment, the USD weakened, particularly against the EUR. This was also the case against GBP until mid-month when the release of the UK GDP figures saw sentiment fall, and by the end of the month, USD/GBP was virtually unchanged.
Crypto continued to suffer from the after-effects of FTX. Confidence is undoubtedly lacking. Bitcoin broke below $17,000 again to close the month at $16,547, down -2.7% in December and a staggering -65% for the year.