Introduction

The global financial landscape in January 2023 opened with a cautiously optimistic tone, marked by easing inflationary pressures, shifting central bank sentiment, and China's rapid pivot from its zero-COVID policy. Investor sentiment improved across major developed and emerging markets as economic data suggested a potential soft landing rather than the deep recession feared in late 2022. However, volatility persisted, driven by divergent growth trajectories, energy market fluctuations, and continued geopolitical uncertainty.

United States

U.S. equity markets began the year with a rally, reversing some of the losses incurred throughout 2022. The S&P 500 posted a monthly gain of approximately 6.2%, its strongest January performance since 2019. Optimism was largely underpinned by signs that inflation was cooling - the Consumer Price Index (CPI) for December 2022 (released mid-January) showed a year-on-year rise of 6.5%, down from a peak of 9.1% in mid-2022.

The Federal Reserve remained hawkish in its language, but market participants increasingly priced in a slower pace of interest rate hikes. Labour market resilience, as seen in the continued strength of non-farm payrolls and declining unemployment claims, added a layer of complexity for policymakers aiming to balance inflation control without derailing economic momentum.

Technology and growth sectors led the rebound after a challenging 2022, supported by falling bond yields and improving forward-looking sentiment.

Europe

European equities performed strongly in January, buoyed by falling energy prices, improving consumer confidence, and better-than-expected economic data. The Euro Stoxx 50 rose by over 9%, with Germany's DAX and France's CAC 40 also posting significant gains.

Milder winter weather reduced energy demand across the Eurozone, which, along with increased gas storage and diversified supply chains, helped avert the energy crisis that many had anticipated. Natural gas prices in Europe fell to pre-invasion levels, easing inflation and alleviating recession fears.

The European Central Bank (ECB) maintained a firm tone on inflation, signalling further rate increases in the months ahead. However, the perceived ability of the Eurozone to avoid a deep recession helped drive equity inflows and improved sentiment in fixed income markets.

Asia-Pacific

China's dramatic and sudden reversal of its COVID-zero policy dominated headlines and market behaviour in the Asia-Pacific region. Equity markets rallied on expectations of a faster economic reopening and renewed consumption growth. The Shanghai Composite gained over 5%, while the Hang Seng Index surged nearly 11%, extending gains from December 2022.

Economic data out of China remained weak for much of the month, with December's retail sales and industrial production numbers undershooting expectations. However, forward-looking indicators - such as mobility data and increased domestic travel around Lunar New Year - pointed to a likely rebound in Q1 or Q2.

Elsewhere in the region, Japan's markets saw modest gains, despite volatility in bond markets as the Bank of Japan (BoJ) adjusted its yield curve control policy in late December. The yen strengthened sharply, reflecting expectations of eventual policy normalization.

Australia's ASX 200 climbed approximately 6.2%, supported by strong performance in mining and financial stocks, as well as optimism over Chinese demand recovery.

Emerging Markets

Emerging markets (EM) saw renewed inflows in January, driven by dollar weakness, falling global yields, and China's reopening. The MSCI Emerging Markets Index rose around 7.9%, marking its best start to a year since 2019.

Latin America remained attractive due to high real interest rates and resilient commodity exports. Brazil, despite political tensions surrounding the new Lula administration, saw strong equity performance. In India, however, investor sentiment was shaken by the Hindenburg Research allegations against Adani Group, which triggered a sell-off in Adani-linked companies and weighed on broader indices.

Commodities

Commodity markets were mixed in January. Brent crude oil prices fluctuated between USD 77 and USD 88 per barrel, ending the month higher on optimism surrounding increased Chinese demand. However, concerns about global economic slowdown capped the upside.

Gold rallied by more than 6%, reaching a 9-month high above USD 1,900/oz, as real yields declined and investors sought safety amid macroeconomic uncertainty. Industrial metals such as copper and aluminium also saw upward momentum, reflecting expectations of stronger demand out of China.

Agricultural commodities remained range-bound, with wheat and corn prices moderating from 2022 highs amid improved supply outlooks and falling freight rates.

Fixed Income & Currencies