Inflation started cooling down

There is hope that FED will end monetary tightening cycle soon
Finally good news from China

After moody beginning of November financial market returns were positive, but volatility remains. The main factors which effected positive results in developed markets were hopes that we already reached the inflation peak, and it started cooling down. If inflation already peeked, it would let the US Federal Reserve Bank to soften its tone. The US S&P 500 index (S&P 500 Total Return EUR Index), which represents major 500 US companies increased by 1.21% during the month. Developed markets (MSCI World Total Return EUR Index) increased by 2.66%. Surprisingly, Emerging markets (MSCI Emerging Markets Daily Net Total Return EUR Index) generated double digits positive 10.23% positive return.

As it became usual, the main news followed by financial market participants during November were interest rate hikes by central banks and inflation. The month began with US Federal Reserve Bank meeting at which it was decided to lift interest rates by another 0.75% rate hike with the most-aggressive monetary tightening since the 1980s. This action was negatively welcomed by investors. The main US stock market index S&P 500 suffered the most on the FED rate hike decision day since monetary tightening began. When the mood in financial markets remained pessimistic, inflation data in the USA was released, showing the consumer price rise slowing – even more than expected. Consumer price index was rising by 7.7% on early basis versus 8.2% the month before. It was long awaited piece of news which changed the direction of the main financial indices. After data release to the public, financial market indices flashed green. There was hope that inflation already reached the peak and started cooling down.

In Europe in macro-economic space there was less euphoria. Christine Lagarde the president of European Central Bank told that the risk of a recession has increased in Europe, inflation remains more than five times higher in euro area than the official ECB target. ECB has already delivered the most aggressive monetary tightening in its history. And it is expected the borrowing costs will be raised at least 0.50% during the next meeting later this year.

Finally, we heard some good news from Emerging Asia region. China decided to ease quarantine and end zero covid policy. These news pushed Asian equities for the biggest advance in more than two years. Together with equity indices, the yuan strengthened and commodities from crude oil to iron ore and copper surged. Despite that, the market participants will be closely following the new spike in Covid cases in China, which stands at odds with the quarantine relaxation measures.

Inflation

Source: Bloomberg LP

“House view” update

Luminor Investment management team decided to restate neutral risk allocation budget. This move mainly was forced due to lower-than-expected inflation data in the USA. Also, higher exposure to defensive sectors (utilities, energy, and consumer staples) was maintained due to monetary tightening cycle.

Luminor House View

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