Market Analysis Feb 2023

During February, US equities experienced a downturn, despite the Federal Reserve's efforts to manage inflation through policy measures. The Fed indicated that policy rates might still need to rise to bring inflation under control. Economic indicators remained robust, with Fed Chair Jerome Powell expressing confidence in achieving the 2% inflation target and highlighting the deceleration of inflation.

In the first February meeting, the Federal Open Market Committee (FOMC) decided to slow the pace of rate hikes by 25 basis points. However, a general consensus emerged among members that rates might need to rise beyond initial expectations.

January's headline consumer price index (CPI) recorded a 0.5% increase, driven by the energy component, following a 0.1% uptick in December. The second reading of Q4 GDP growth was revised down to 2.7%, still considered robust.

The S&P 500 faced weakness across almost all sectors, except for technology, which demonstrated relatively greater resilience. Notably, chipmaker Nvidia delivered strong results and announced greater involvement in artificial intelligence, bolstering its performance. Energy emerged as one of the weakest sectors, largely due to concerns about potential cost pressures.

In February, Eurozone equities posted gains, with communication services, financials, industrials, and consumer staples leading the charge. However, real estate, IT, and healthcare sectors experienced negative returns.

Promising signs emerged in the eurozone economy, as forward-looking data indicated robust expansion of business activity since May 2021. The flash Markit composite purchasing managers' index for February climbed to 52.3 from January's 50.3. (A reading below 50 suggests contraction, while above 50 indicates expansion).

The European Central Bank (ECB) raised interest rates by 50 basis points, elevating the main refinancing rate to 3.0%, and another increase was anticipated in March. Despite expectations of a moderated rate hike due to easing January inflation, preliminary data for February revealed inflation upticks in France and Spain, casting doubts on hopes for the cessation of rate hikes.

The European Commission introduced a Green Deal Industrial Plan in February, aiming to support the expansion of manufacturing capacity for net-zero technologies and products, essential to meet Europe's climate objectives.

Throughout the month, UK equities exhibited resilience, with large-cap companies among the top performers, and the FTSE 100 index attaining a new record high. The energy, healthcare, and telecoms sectors spearheaded the market, benefiting from renewed dollar strength, as uncertainties arose about the necessity of higher-than-anticipated US interest rates.

Furthermore, numerous domestically-focused segments of the market outperformed, as it emerged that the UK economy had proven more robust than initially projected. Notably, the Office for National Statistics' latest GDP data revealed that the UK economy did not contract in Q4 2022, thus avoiding a technical recession by sidestepping two consecutive quarters of decline following Q3 2022's contraction.

The Bank of England's quarterly projection for the UK still forecasted an impending recession later in 2023, yet envisioned a shallower downturn than previously envisaged, owing to a significant decrease in wholesale energy prices since November. During the latest Monetary Policy Committee meeting, the Bank raised the UK base rate by half a percentage point, with accompanying remarks implying that the rate had peaked for this cycle.

February witnessed a slight 0.9% uptick in the Japanese stock market in local terms. The yen's marked depreciation positively impacted market sentiment after Kazuo Ueda, an economics professor and former policy board member of the Bank of Japan (BoJ), endorsed maintaining the status quo on monetary policy during testimony to the Diet. Exporters benefited from the yen's weakness, which contributed to a market boost.

The surprise nomination of Kazuo Ueda as the new BoJ Governor by Prime Minister Kishida contrasted with market consensus, which had anticipated the role to be granted to Masayoshi Amamiya, the current deputy governor, who declined the position.

Inbound tourism's rapid recovery was evident, with foreign visitor numbers in January returning to 60% of pre-Covid levels. This resurgence bolstered sales for domestic companies in retail, hotel, and service sectors, as indicated by Q4 earnings results.

Inflation in Japan has steadily ascended, with CPI reaching 4.3%, the highest level in four decades. In response to this historically high inflation, the Japanese government and BoJ have encouraged companies to increase wages during the annual wage negotiations in March.

Q4 2022's earnings results, announced from late January to mid-February, yielded mixed outcomes. Exporters confronted challenges due to the yen's appreciation and technology sector production slowdown in Q4 2022. Domestically-oriented companies posted better-than-expected sales figures but encountered cost escalations, including a hike in electricity prices.

Asia ex Japan equities underwent negative performance in February, with China and Hong Kong witnessing substantial declines leading the way. Escalating geopolitical tensions played a role in this decline, partially reversing the strong gains of previous months. All index markets concluded the month in the red, with Indonesia experiencing the smallest fall. Thailand, Malaysia, and South Korea registered significant drops as investors took profits following January's strong performance, fueled by China's reopening.

In the same month, Indian equities faced weakness, attributed to concerns over domestic inflation figures and global events like the ongoing conflict in Ukraine, which heightened investor apprehensions regarding growth. The fear of interest rate hikes during a worldwide economic slowdown contributed to weakening investor sentiment in the country. Singapore, Taiwan, and the Philippines also ended the month with share price declines, albeit relatively more modest ones.

During February, global government yields climbed, while risk assets faced challenges. US credit spreads expanded due to market expectations of an extended period of higher interest rates. Conversely, European credit performed better. The US lagged as activity data rebounded, including stronger-than-anticipated US payrolls and improved survey data, leading to expectations of an extended period of higher interest rates. Meanwhile, European data displayed limited signs of improvement in the manufacturing sector, although PMIs demonstrated more positive momentum compared to just a few months prior, with the composite number rising further into expansionary territory. Japan's markets encountered uncertainty regarding the implications of Kazuo Ueda's nomination as Bank of Japan governor, particularly concerning yield curve control.

Throughout the month, US 10-year and two-year yields, as well as Germany's 10-year and the UK's 10-year and 2-year yields, all increased. The US dollar generally strengthened against most G-10 peers, excluding the Swedish krona, which gained strength due to higher-than-expected inflation and anticipation of a hawkish response from the Riksbank.

Convertible bonds demonstrated their efficacy as a hedge against equity market losses, with the Refinitiv Global Focus experiencing less than a 2% decrease in US dollar terms. Primary market activity remained robust, with new paper amounting to US$10.2 billion, primarily originating from the US followed by European convertibles.