HYCM: Three market questions to ask for 2023

This article was submitted by Giles Coghlan, Chief Market Analyst, consulting for HYCM

With so many rapid changes in both the geopolitical and economic landscape, it is becoming increasingly difficult to make yearly predictions. As the year unfolds, the Fed’s path, China’s reopening, and the stickiness of inflation will define the direction of FX, commodities, indices, stocks, and other trading assets offered by HYCM. Therefore, let’s look at the three interrelated questions that are hot for the markets in 2023. 

Recession or Soft Landing?

The tide appears to be turning on the question of whether a recession or a soft landing is in store for 2023. Towards the end of 2022, sentiment became very bearish on the prospects of a soft landing, with a recession being touted almost as an inevitability in many quarters. The new year has brought with it a new wave of optimism, which is also being reflected in the price action, with the S&P 500 currently back over 4000 at the time of writing.

Analysts from Goldman Sachs Research now expect a year of “below-potential growth and labor market rebalancing” to bring inflation back under control. The bank sees this happening in four steps.

The first involves keeping GDP growth below potential, which it sees the Fed’s tightening as achieving. This will lead to a gradually cooling labour market in step two, where the gap between job openings and workers is expected to narrow. A further drop in job openings throughout 2023 is expected, along with a slight rise in the unemployment rate.

In the third step, this contributes to a slowdown in wage growth, which has already started to moderate; the bank expects it to fall to 4% by the end of the year. Finally, cooling wage growth should bring inflation back into bounds, with Goldman expecting PCE core inflation to decline to 3% by December of this year.

In short, the bank’s analysts believe that there is a possible path to a soft landing, but that this will be dependent on the Fed being able to tweak policy “just right” in order to stay on track.

Even Larry Summers, who has previously stated that a recession was inevitable, has recently softened his own stance regarding a soft landing. “I’m still cautious, but with a little bit more hope than I had before. Soft landings are the triumph of hope over experience, but sometimes hope does triumph over experience.”

Bank of America’s “sell-side indicator” has been falling precipitously since 2021. In December of 2022, it fell by 33 basis points, to a level just short of “extreme bearishness” which has historically signaled a reversal point and a buying opportunity. These potential turning points occur when investors are overwhelmingly leaning in one direction, as in the extreme jubilation that typically characterises the top of asset bubbles.

Tesla recently made it onto a list of 46 stocks that Goldman Sachs believes will perform well in the event of a soft landing. Tesla and other stocks are available for HYCM’s investors, who can also access Seasonax, the premier tool for discerning seasonal trends in the stock market.

Dollar Bounce or Continued Weakness?

Central to the above concerns is the prospect for the US dollar in the year to come. Many analysts were predicting a bounce in the greenback as the fears of a US recession followed by a global recession continued to mount in the latter half of 2022.

The continued improvement in sentiment surrounding the possibility of a US soft landing specifically and the global economy’s prospects more generally are causing analysts to cut their forecasts regarding the US dollar’s performance in the year ahead.

As fears of the severity of the downturn expected from a global tightening of financial conditions continue to ease, Morgan Stanley recently trimmed its 2023 year-end forecasts for the US dollar index from 104 to 98.

The bank now expects the EURUSD exchange rate to rise to 1.15 by the end of 2023, where it had previously forecasted a year-end rate of 1.08.

Dollar strength was one of the prominent themes of 2022. Bolstered by rapidly rising rates, an uncertain geopolitical situation, and expectations of an imminent recession. Last year, a surging dollar exacerbated weakness in many dollar-denominated assets, from commodities to crypto. A 2023 reprieve from this condition could signal a change of fortunes for these asset classes, particularly in the event that recessionary fears prove to have been overblown. This situation will become clearer as more information is released and with the intuitively designed HYCM Trader mobile app, investors can ensure they never miss an upcoming trade no matter where they are.

Gold Bull Market or Retracement?

Gold is currently in the middle of a multi-month surge that’s seen it going from the low $1600s at the end of October, to the low $1900s at the time of writing. Supported by central bank purchases throughout 2022, the 20% rally from year-end through to the start of 2023 has many analysts convinced that a more pronounced bull market may be in store for the yellow metal throughout 2023.

Ongoing de-dollarisation in the face of an uncertain geo-political climate is a major tailwind to the yellow metal, which is performing surprisingly well in a higher-rate environment. Should a pivot in monetary policy be also set in motion in 2023, the prospect of lower rates will likely provide further steam to an already impressive rally.

However, it’s probably the US dollar that’s likely to hold the keys to the fate of gold and exert the greatest influence on its performance in the year ahead. The DXY’s peak in October, and gold’s recent rally occurred at roughly the same time, with the two charts appearing to be mirror images of each other since late last year.

Gold recently made it into Saxo Bank’s 10 black swans for 2023 list, in which an incredible forecast of gold hitting $3000 dollars per ounce was made. The backdrop for this outlandish prediction is an expectation of increased economic isolationism and self-reliance over globalisation, as well as inflation proving to be far stickier than markets are currently pricing in.

Such a move is, of course, highly unlikely requiring a 55% rally from current levels, however, a fresh all-time high is not out of the realm of possibility. On the monthly time frame, at least, gold is currently within striking distance of all-time highs against the yen, sterling, euro, and the US dollar.

China’s goal of creating a petro-yuan in which the renminbi can serve as a global reserve asset rivalling the hegemony of the dollar, is dependent on its growing gold reserves, as well as the convertibility of the renminbi to gold in order to lend it wider credibility. The actions of the G7 against Russia in the wake of its war in Ukraine, also make gold more attractive to governments who fear falling on the wrong side of Western sanctions. Gold underperformed in an era of globalisation, where trust in the fiat system was high, could it be set to outperform in an era of deglobalisation? In fact, it is one of the most traded assets at HYCM.

Uncertainty is the Only Certainty

That is why it is important not to become married to any one narrative. A perfect example of why, is that much of the above would have been quite different just a month ago.

Investors operate in an uncertain environment at the best of times, but perhaps more so in 2023 when we have such a divergence between what the Fed has been signaling and what markets expect.

Add to this a highly uncertain geo-political situation, with an ongoing kinetic conflict in Eastern Europe, and ongoing tensions between the West and both Russia and China. To say nothing of the completely unforeseen events that can take everyone by surprise, which we’ve seen plenty of in recent years.

Continued uncertainty and volatility may be the only certainty for market participants in 2023, which makes position sizing, risk management, and the levels of cash reserves very important to get right. If all these factors are carefully considered there are many possibilities for trades.

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