January saw softer inflation data and increasingly positive data from key western economies. Encouragingly, there was less talk about an imminent global recession.
China may be opening up, but it also has a nasty habit of surprising on the downside. Chinese equities have rallied, yet market participants still need further convincing that they will stay this way. If the doors close once more, the risk of global recession is immediate.
We are in a sensitive environment, with markets on edge, and even with improving data, central banks continue to maintain their hawkish approach.
In such times, we turn to the VIX, which at 19.3 remains above the average of 17, but only just; this is a far cry from the 30-plus readings we saw last year. A far more worrying gauge is the Doomsday Clock, which sits at 90 seconds to midnight and is at the closest point to catastrophe as it has ever been. With no signs of a let-up in the Russia-Ukraine conflict, the clock is only likely to tick down further.
In scenes reminiscent of World War II, Russia has unfortunately been relentlessly attacking Ukraine lines with waves of soldiers. As we close in on the anniversary of the invasion, it is now about the speed of getting western tanks to the front line before the next big offensive. This controversial move only served to encourage yet more fiery Russian rhetoric and provided another reason to fire missiles into central Ukraine.
The first half of the month saw headlines around China's Covid infections spiking as it ended the Covid-Zero experiment. By Lunar New Year, it was business as usual, with more than 300 million trips during the holiday and theatres packed. It remains to be seen if there is a price to pay, but China has claimed the wave is "coming to an end."
From the west's standpoint, China has been making more encouraging market-friendly noises. Speaking at Davos, Vice-Premier Liu said that China "must open up wider and make it work better." It has even stopped attacking China's tech companies.
As things stand, it is not an absolute given that we will have a recession this year; this is a significant change from the end of last year, and current data certainly backs this up, with inflation generally falling. US CPI in December was its lowest level in more than a year at 6.5%, down from 9.1% in June, while labour costs appear to have slowed for the third consecutive quarter. Eurozone inflation is also back in single digits, with the flash index of 20 European countries standing at 9.2% in December, compared with 10.1% in November and 10.6% in October.
"The signals are mixed in a way that we haven't seen before," said Claudia Sahm from Sahm Consulting and former Fed economist, speaking to Bloomberg. According to the commerce department, the US economy grew at 2.9% in Q4, against a forecasted 2.6%. Germany certainly believes it can skirt around a recession, and we believe them. The UK's position is far more tenuous, with the IMF giving a damning forecast, downgrading UK growth and predicting a contraction of 0.6% and its first recession since 2009; even Russia's economy looks set to outperform the UK's...
Regardless of improving data and corners turned, central banks remain generally hawkish, with rate rises still expected in the coming days. Christine Lagarde has made it clear that the ECB will be 'staying the course'. Having raised rates, global central banks (bar BOJ) now have monetary weapons to play with to catalyse future growth.
In this environment, tech stocks were again back in favour, with the likes of Tesla and Amazon up +40% and +22%, respectively. By the end of the month, the Nasdaq was up over +10% to close at 11,584 while the S&P 500 was up +5.7% at 4,076. In Europe, the FTSE 100 flirted with all-time highs to close up +4.3% and the Dax +8.7%. In Asia, the Hang Seng Index was up +10.4% and CSI 300 +7.4% as China reopened and put a line under the Covid-Zero policy, while the Nikkei 225 also rose +4.7%.
The Bloomberg Commodity Index was marginally down for the month (-0.6%), while coal and gas saw big falls (-32.7% and -24.7%(TTF)). January was a cold month for Europe, yet European regional storage sat at a high for the time of year. Oil markets were relatively unexciting, closing down a touch as markets digested news of China reopening, high US stockpiles and speed of recovery. Gold rallied as central banks bought heavily to close the month up almost +6% and silver fell -1.04%.
January saw crypto return to favour. Bitcoin was up +40% and Ether over +30%. Bitcoin is now back to where it was in November, pre the FTX fiasco. The bulls are certainly talking this space up again, although some commentators are wondering if it is a dead cat bounce.
In currencies, there were marginal gains during the month for the EUR and GBP against the USD, with the EUR back to where it was in April last year.