Relief Rally Unlikely to Continue

Tuesday 20 December 2022

Global Investment Views, Equity, Fixed income

   

Relief Rally Unlikely to Continue

January 2023 | For markets, this economic backdrop calls for a confirmation of a correction regime at the end of 2022 and in H1 2023, with inflation slowing, but still above normal levels. The correction phase will likely be driven by the profit recession, which we expect to materialize in H1. We believe a more cautious stance in equities would be prudent. For government bonds, slowing economic growth and hints about the change in the size of rate hikes may call for an active duration stance.

01 |  Amundi Institute Insights: The USD cycle is being stretched. We expect to see a bumpy road, but suggest positioning for a stronger USD depreciation in 2023.

02 | Fixed Income: While inflation remains elevated, we are seeing signs of it peaking in the US and somewhat in Europe.

03 | Equity: US companies may face a margins squeeze as employment remains robust, wages are rising, and dollar headwinds persist.

Global Investment View - Relief Rally Unlikely to Continue

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of December 20, 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.

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A Relief Rally, Excess Optimism Overdone

Markets have seen some recent relief in a year that overall is likely to be remembered as among the most challenging for investors. This recent market move has been supported by an alignment of stars on various fronts: (1) US inflation on a downward path, wherein we believe the market rally and the exuberance is excessive, as the Fed will remain focused on the inflation target and it is too early to claim victory there; (2) The earnings season was bad but not as bad as feared; (3) China’s COVID-19 policy relaxation, which has happened earlier than expected, but full reopening will be in 2024; and (4) Geopolitical uncertainty, with regard to which there has been some pause after elections – in the US, the mid-terms saw no major surprises and were quickly digested by the market, which reacted well to a divided government that should deter populist policies.

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Fed Pivot is Not Around the Corner

Central banks are working out how far they should go in terms of their aggressive tightening talk. The strong job market does not support a shift in stance from the Fed; while signs of moderation are emerging in wage growth, it remains above pre-crisis trends, and inflation is persistent and challenging. While the peak in US inflation is likely behind us, recent data confirm that core inflation remains sticky. Financial conditions are tight, but could become even tighter as the Fed’s risk of overshooting remains high. Globally, questions over long-term debt sustainability come at a time when markets are clearly addicted to central bank liquidity. As we saw in the UK, the miscalibration of fiscal and monetary policies can force a central bank to step in.

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