Research Insights - Market Commentary December 2022
Markets were weaker in December with three main events helping to reverse the positive momentum that equity markets had gained in the previous quarter being:
The US Federal Reserve raised rates by 50bps in December, moving their benchmark borrowing rate to 4.25-4.50%. Investors had to digest the implications of yet another increase in the US Fed Funds rate as well as a cautious tone to the ensuing commentary from the US Federal Reserve;
The lifting of COVID restrictions in China was initially viewed positively. However, a surge in COVID cases within China has put China’s health system under pressure, raised concerns about ongoing disruptions to supply chains and created heightened concerns amongst the Chinese population;
The Bank of Japan unexpectedly changed their “yield curve control” policy now allowing a previously artificially suppressed 10-year bond yield to rise – a move which strengthened the Japanese Yen and shocked investors.
These events saw inflation expectations lift further, confidence in central banks wane, bond yields reprice higher (causing capital losses for bond holders) and many equity markets selling off as lower earnings and higher discount rates were factored into stock prices.
The Australian share market was down 3.2% in December and over the 12 months was one of the few stock markets globally to have a positive return, albeit up by 0.6% with Energy, Utilities and Materials the only sectors that were positive in 2022. Currency-hedged international equities fell 5.2% while unhedged international equities were slightly weaker at -5.5% in the month due to a strengthening Australian dollar that was up 1.5% in December and now buying US$0.6813.
A rise in bond yields saw passive bond holders incur losses in December. Bond yields increased markedly in 2022 which resulted in the Australian bond benchmark falling 9.7%. The rise in bond yields in December and over the year were a significant contributor to negative returns for the Australian listed property sector which fell 4.1% in December.
The RBA raised the cash rate in December by 0.25% with the cash rate is now sitting at 3.10%. The Australian 10-year government bond yield rose by 52bps to 4.05% and the 2-year government bond yield rose by 29bps to 3.40%. The US 10-year government bond yield increased by 27bps to close at 3.87% and the US 2-year government bond yield increased by 12bps to 4.43%.
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