The Polish stock market in the first half of January was one of the strongest in the world. The Swedish economy entered a recession, and the value of gold achieved the awaited increase. What else did the market surprise us with at the beginning of the year? Take a look at Phinance expert Marcin Lau’s assessment of asset class prospects.
ACCOUNTS
We can sustain the thesis that investors who bought Polish stocks last autumn do not want to leave the market without a profit. Only controlled leaks about another credit vacation (for which the banks will pay) caused their slight discount of a few percent. Unfortunately, they also showed very well what risks the stock market is subject to in an election year.
One-session price declines are being used to take positions, and all indications are that the prevailing trend in the coming month will be upward. Unless a potential deep discount of the US market leaves no way out.
It is difficult to point to fundamental reasons behind the rise in stocks. Neither the Polish market, after gains since October, is excessively cheap, nor is the armed conflict across the eastern border resolved. Nor is there a broad stream of KPO funds. What remains is faith in the greed of U.S. investment banks to decide the end of the increases on the WSE. In order for those who bought stocks in the fall to make money, they need to find “takers.” And so far there is not much to give those shares to. Domestic investors are staying away from stocks, and PPKs (which would be an ideal element to pick up stocks), don’t have that power yet.
On the morning of January 30, Statistics Sweden (Sweden’s statistical office) released fourth-quarter GDP data. Noteworthy is the fact that the Swedish economy has just entered a recession. According to Nordea’s estimates, the negative GDP figure will get much worse. This reading, along with weak data from Germany, does not quite correspond with the expected soft landing of the community economy.
Only 0.5% on an annualized basis grew the German economy in the fourth quarter of last year, according to preliminary estimates by Destatis (the German statistics office). The market expected a slowdown to +0.8% y/y from +1.2% y/y. Thus, clearly below expectations. It seems that more and more announcements will include the word “recession.” And it’s hard to point to a year in which the entry into recession would be accompanied by a bull market in the stock market. For the time being, however, the domestic economy grew by 4.9% in 2022. The market expected a reading of +4.8% y/y. So it is a little better.
OBLIGATIONS
On February 1, the US Federal Reserve will raise interest rates. As of the date of writing this commentary, the scale of the hike is not yet known. However, speculation is intensifying that the US central bank will be less aggressive in raising the cost of money. The bond market is eagerly discounting the end of the cycle (summer 2023?), what’s more – bonds in the US are entering price ranges that price out rate cuts over the next year.
A recession that spills over the world will be an argument in favor. Even more so in Poland, because of the election year, a campaign nod to borrowers by lowering rates is likely. The problem is that domestic bonds are rising like crazy (the performance of funds with the name “Treasury” in the title is several tens of percent gain in one quarter). However, they have raked up to levels unauthorized by either the condition of the economy or the state of public finances.
Those who believe that we are following, with some delay, the “Hungarian way” should carefully read the announcement of a key rating agency. It noted that the economic slowdown, rising energy prices and the suspension of most EU funds to which Hungary is entitled are putting pressure on the state budget. It is worth mentioning that the central bank keeps interest rates at the highest level in the entire European Union.
Thus, in its latest report, S&P Global Rating agency downgraded Hungary’s rating from “BBB/A-2” to “BBB-/A-3,” but at the same time changed its outlook from “negative” to “stable.” On January 20, in its latest report, U.S. rating agency Fitch affirmed Hungary’s rating at “BBB.” However, it changed the rating forecast from “stable” to “negative.”
Just as there was little rational explanation for the collapse of Polish bonds last autumn and the jump in yields to over 9%, there is little rational argument for yields falling to around 5% now, with the NBP reference rate at 6.75%. The bond market is behaving as if U.S. investors (the main buyer of Polish bonds at the moment) believe the opposition will win the election and are already taking positions in the debt market.
The inflationary euphoria generated by the temporary reduction in the decline in the value of money has pushed bond prices very high. And U.S. hedge funds have the largest net short position in U.S. Treasury bonds ahead of the Fed meeting. So they assume that prices will fall again. The winter holidays are in full swing, so it’s time for a downhill slide.
CRUDE
The price of oil was among the balancing market forces. It ended the month at price levels from the beginning of the year. On the one hand, the market is hopeful that there will be an increase in demand for crude from China, on the other hand, we have concerns about a recession in the United States. The Fed will raise interest rates in the US once again (bad news for industrial commodity prices), but some investors expect the rate hike cycle to end soon.
Central banks’ monetary policy announcements will determine price movement in the coming months. Here, announcements of further rate hikes will limit the potential for oil price rallies. The upward medium-term trend, however, seems to be established. Goldman Sachs analysts forecast that oil will become more expensive to $100 per barrel by Q3. A similar forecast also appears in UBS reports.
The gold market has given decent returns in recent months, as illustrated by the Phinance Esaliens GOLD that is on offer. With the dollar losing value, gold has finally dawned. There is hope that this is not the end of the increases. After all, the Fed has lost its role as a leader in the field of tightening to the European Central Bank. In the Eurozone, a repeat of December’s half-percentage point hike is practically a foregone conclusion. Investors believe that the ECB Governing Council in March will say three times lucky, and close the entire cycle with the deposit rate at 3.5 percent.
Geopolitical uncertainty and high inflation are the main factors driving central banks to record gold purchases in 2022. Demand from them amounted to 1136 tons, the highest since 1967, with purchases coming mainly from banks in emerging markets, including Turkey and China. In the context of a few months, one can count on further appreciation of the EURO and thus an increase in the price of gold to the mythologized barrier of $2,000 per ounce, after holding an earlier correction for which $1880 will be a strong support level.
CURRENCIES
The 4.72 level on the EUR-PLN pair, which has been tested for a good few sessions, has so far not been broken. Any exit above it is met with a counterattack from that side of the market, which is playing for a stronger zloty. The most important currencies in 2023 are trading up sharply against the US dollar. Last week, commodity currencies such as the Australian, New Zealand and Canadian dollars performed best among the G10. The others, meanwhile, avoided major fluctuations. Latin American currencies continue to stand out positively. With investors focusing primarily on commodity economies, strong rallies are especially true for the Brazilian real and the Colombian and Chilean pesos.
Despite the strengthening of the region’s currencies, the zloty, as it was, remains glued to the 4.70 level against the euro. While our currency failed to keep up with the strengthening euro last month, a return to the weakness we saw several times last year is out of the question for now. The divergence between the regional basket and the zloty may be due to the risk of handouts before the elections, which investors have to price in. The zloty is not helped by the lack of resolution of the NSP, especially since the money is not there yet, and there are already announcements of its release (laptops for 4th graders). Macro data should strengthen the zloty. Poland’s GDP data for 2022 was announced: a growth rate of 4.9% means that Poland was among the world’s top economies last year, leaving China, among others, behind.
The data had no impact, and yet, it should appreciate the zloty. So, on the one hand, one can hope that the zloty will strengthen in the perspective of the next quarters, chasing the currencies of the region, while on the other hand, the recent gains of the currencies of growth markets seem unsustainable. There will be a leadership change on the EUR-USD. The ECB will now raise interest rates faster.
Inflation in Euroland, after hitting a year-on-year high of 10.6 percent in October, has already returned to single digits in December. In contrast to the US data, readings from Euroland surprised positively. The powerful slide in gas prices and the mild weather during the first part of the heating season meant that fears of an energy crisis leading to a deep recession evaporated. The euro, heavily discounted in the past year, has regained its resonance and is recovering.
Source: Phinance S.A
