Global Stock Markets Strongly Rise in the First Week of the New Year

In the first week of 2023, stock prices on global markets rose sharply as investors were encouraged by the easing of inflationary pressures in the US and the eurozone, which could lead central banks to soon end the cycle of interest rate hikes.

On Wall Street, the Dow Jones strengthened by 1.5 percent to 33,630 points, while the S&P 500 also rose by the same rate, reaching 3,895 points. The Nasdaq index gained 1 percent, finishing the week at 10,569 points.

Trading on the world’s largest stock exchange was uncertain until Friday, when employment and wage data were released in the US.

In December, the number of employed increased by 223,000, slightly more than expected, while wages rose by 0.3 percent on a monthly basis, less than anticipated.

Additionally, it was reported that activities in the service sector fell in December for the first time in more than two and a half years.

Interest Rates Will Remain High Longer Than Expected

Thanks to the slowdown in wage growth, and thus inflationary pressures, stock indices jumped more than 2 percent on Friday, recovering all losses from previous days and finishing the week in the positive.

Investors hope that interest rates at the end of the hiking cycle will be lower than what Fed officials estimate and that the central bank will start lowering rates as early as this year, although the Fed has signaled that it may not do so until 2024.

Although the Fed’s minutes from the last meeting of the previous year did not support these hopes, stock prices rose.

– The market is like a child asking for ice cream. Parents say ‘no’, but the child keeps asking for ice cream because parents have previously been known to give in. Thus, the market continues to expect to get ice cream, but not as quickly as it thought – explains Burns McKinney, portfolio manager at NFJ Investment Group LLC.

McKinney believes that the minutes show that Fed officials are afraid that unjustified easing of financial conditions could complicate their efforts to combat inflation.

He also emphasizes that it is clear that the Fed will slow the pace of interest rate increases to avoid pushing the economy into recession, but it can be expected that rates will remain elevated longer than previously anticipated.

Mike Loewengart, portfolio director at Morgan Stanley Global Investment Office, shares a similar view.

– The Fed’s minutes serve as a reminder to investors to expect elevated interest rates throughout this year. Given that the labor market remains strong, it is logical that fighting inflation remains the Fed’s priority. In short, although we have changed the calendar, the headwinds in the market remain the same as last year – says Loewengart.

Last year, the S&P 500 index plunged more than 19 percent, the most since the global financial crisis of 2008, as the Fed aggressively raised interest rates to curb inflation, which reached its highest levels in over 40 years by mid-year.

Easing Inflation in the Eurozone

Stock prices on European markets also rose sharply last week. The STOXX 600 index of leading European stocks jumped 3.4 percent.

The London FTSE index rose 3.3 percent to 7,699 points, while the Frankfurt DAX surged 4.9 percent to 14,610 points, and the Paris CAC nearly 6 percent to 6,860 points.

The strong growth of the indices is attributed to data that sparked hope that the decline in manufacturing activity in the eurozone has bottomed out and that a recovery could begin.

Investors were also encouraged by data showing easing inflationary pressures in the eurozone for the second consecutive month, which could lead the European Central Bank to slow the pace of interest rate hikes.

Support for the markets is also provided by investors’ hopes that the growth of the Chinese economy will soon accelerate, as authorities there are rapidly easing restrictive COVID measures.

Many hospitals and cemeteries report being under pressure due to a high number of COVID infections and deaths, but investors hope that once the wave of infections passes, life and consumption will return to normal, so they are not paying attention to current problems.

Especially since the Chinese central bank has announced that it will provide financial support for domestic consumption, key investment projects, and the real estate market.

– The reopening of China has a significant impact worldwide. It boosts tourism and consumption, and could also eliminate bottlenecks in supply chains that caused problems for manufacturers in 2022 – says Joanne Goh, an analyst at DBS Bank.