Global Asset Allocation: The View From Europe

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Market Perspective

• Volatility likely to remain elevated in the new year as central bank policy expectations diverge amid evidence of slowing growth and moderating inflation.
• While slowing the pace of tightening, the US Federal Reserve reinforced its commitment to taming inflation, signalling that policy rates may need to stay higher for longer despite the negative impacts on growth and employment.
• The European Central Bank (ECB) struck a hawkish tone amid its battle against inflation despite acknowledging the likelihood of a near-term recession. The Bank of Japan (BoJ) made a surprise move towards policy normalisation by adjusting its yield curve controls to provide flexibility for yields to move higher. The Bank of England (BoE) may hike rates less than expected because of a potential UK house price driven recession.
• Moderating pressures from higher US rates and a strong US dollar could become tailwinds for emerging market economies and a reprieve for their central banks. While uncertainty remains, sentiment towards China could improve following easing of zero-COVID restrictions along with signalling from policymakers that more stimulus measures are on the way.
• Key risks to global markets include central bank missteps, persistent inflation, potential for a sharper slowdown in global growth, China’s balance between containing the coronavirus and growth and geopolitical tensions.