Central banks are motivated to keep interest rates high, which could send assets lower. However, a relief rally could occur.
The year 2023 is already running and many wonder where stocks, commodities, fiat currencies, or cryptocurrencies will go this year. Our team of analysts covered all these assets in eight articles, which will be summarized in this one article. Let’s start with stocks.
Stocks: will the market take a u-turn?
There are a number of factors that could make investing in stocks challenging in 2023. These include the Fed’s decision to raise interest rates, the ongoing conflict between Russia and Ukraine, economic uncertainty, and rising prices.
While the Fed is working to reduce inflation, one of the most pressing economic questions for the stock market projection for 2023 is whether or not the United States will experience a recession. Some analysts at JP Morgan believe the S&P 500 will retest its 2022 lows in the first half of 2023. Experts predict new lows for indices in 2023.
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Rapid stock market recoveries, aided by the Fed, have become the norm for many investors. However, the market may be in for a period of consolidation as long as the Fed maintains its hawkish tone. In 2024, it is possible that central banks will reverse course and announce rate cuts. Because of this, asset prices and the economy as a whole are expected to rise steadily through the year 2023.
The bad news is that this requires an economic downturn. There would likely be an increase in unemployment, greater market volatility, a decline in the number of risky assets, and a slowing of inflation. So, overall, the outlook for stocks is mixed, with probably more focus on specific sectors by investors than stock indices.
Commodities: gold, oil, and wheat in 2023
An economic downturn in the first half of 2023 could affect a number of countries, prompting some central banks to slow the speed at which they are raising interest rates. This would make gold more attractive. The only thing that every country’s central bank or government holds as an asset is gold. In the third quarter of 2022, central banks bought 400 tonnes of goldaccording to the World Gold Council.
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This was nearly double the previous quarterly record of 241 tonnes, seen in the previous year. According to Swiss Asia Capital’s CIO, Juerg Kiener, gold prices could hit between $2,500 and $4,000 per ounce in 2023. He also noted that rising interest rates and fears of a recession were keeping markets volatile.
Gold futures 1D chart, source: tradingview.com, author’s analysis
Oil’s rally ended in the second half of 2022, taking it 33% lower from its peak. There may soon be additional support due to the United States announcement that it would start replenishing its Strategic Petroleum Reserves (SPR) at a price between $68 and $72. Moreover, the risk of a recession is likely already factored into the price of crude despite the tepid response to China’s reopening so far.
If economic data shows more resilience than expected in the 1Q of 2023, then there may be a space for hope. Additionally, it is anticipated that the US economy would slow, as would the economies of Europe and the United Kingdom, potentially leading to lower oil consumption. It is predicted that in 2023, the increase in oil supply will be less than the increase in demand, which could lead to an upward trend in oil prices.
Oil futures 1D chart, source: tradingview.com, author’s analysis
Forex: the US dollar is expected to weaken more in 2023
The performance of the USD far outpaced that of any other fiat currency. The US dollar rose by over 20% in September of 2022, outperforming both cryptocurrency and stock market returns. As interest rates were steadily raised by the Fed throughout 2022, the US dollar rose to dominance in the forex market.
However, USD has peaked against other currencies as the Fed approached its likely destination and pulled back from 75 bps hikes. The hawks at the European Central Bank now control the narrative, and they do not think that the current plan to raise interest rates by 250 bps will be sufficient.
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After a steep decline of over 20%, the eurodollar finally found support at 0.953. However, it suddenly rose by 700 pips to 1.0700, well before Christmas. Despite the fact that this unexpected bullish move caught many traders off guard, it now appears that the uptrend is here to stay. The first few weeks of the new year, however, are likely to bring a reversal.
Based on the OsMA indicator, it appears that the current market is extremely overbought, making a significant correction desirable. If EUR/USD were to reach parity, it would be an excellent area to enter a long trade, as the gap would then be completely filled, but this is unlikely. Even though the eurodollar is currently trending upwards, it is expected to decline in the first quarter of this year before possibly rising to 1.1000 or even 1.1400 by the end of 2023.
EUR/USD weekly chart, source: tradingview.com, author’s analysis
Crypto: is recovery ahead possible?
When it comes to crypto, 2022 will be remembered as one of the worst years ever. The market cap of cryptocurrencies shrank by more than $2 trillion. As of 2023we can expect to see a gradual push towards CBDC adoption from a number of national banks. If this occurs, it may encourage more people to switch to using digital payment methods, including, of course, cryptocurrencies.
Even the largest retailers in the world (eg, Pick n Pay) are starting to accept Bitcoin as a form of payment. Because of the potential impact of rising interest rates on the value of cryptocurrencies, dollar-cost averaging (DCA) may be a good way to build a cryptocurrency portfolio in 2023.
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When it comes to Bitcoin, for the first time ever, BTC prices fell below the previous cycle’s ATH, which in this case was the $20,000 mark from 2017. There hasn’t been a more severe market drop than Bitcoin’s recent fall below $16,000. It has dropped by 77% in just a year. Only in 2011, 2014, and 2018 did BTC experience similar declines. The current bear market has lasted longer than any other in history.
It is typical for Bitcoin activity to drop dramatically in the year leading up to the halving (2015, 2019, and now 2023), which occurs in 2024. That has been one of the biggest catalysts of an uptrend ever since. Because of this, BTC is unlikely to create a new all-time high in 2023, but a rise to around $30,000 in the second half of 2023 is possible. The downtrend is still ongoing despite the recent massive pump to $21,000.
Bitcoin monthly chart, source: tradingview.com, author’s analysis
Fed: higher interest rates will persist
Seventh consecutive interest rate hikes were implemented by the Federal Open Market Committee (FOMC) at its meeting in December 2022. At its last meeting, the Fed updated its economic predictions but refrained from declaring a recession. However, interest rates are expected to remain high throughout the whole year.
Fed Chairman Jerome Powell claimed that, despite the Fed’s efforts to deliberately slow down the economy in order to control inflation, he is confident that the nation can maintain “moderate” growth and expects just a “modest” rise in unemployment.
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The Fed has a pretty gloomy outlook for 2023, with a growth of only 0.5% and an increase in unemployment that would result in approximately 1.6 million additional unemployed individuals by this time next year. In 2023, unemployment could allegedly rise from its current 3.7% to 4.6% and then remain at that level for the next two years.
ECB: more rate hikes incoming in 2023
While the Fed may be almost done with rate hikes, ECB is seen its rate hikes as insufficient. The ECB raised interest rates by 50 basis points at its December meeting, bringing the deposit facility rate to 2%.
The central bank also announced that beginning in March, it will no longer reinvest €15 billion per month of bond proceeds from its Asset Purchase Program. During Q3 2023, this figure is expected to reach €20 billion, and during Q4 2023, €25 billion.
The ECB has revised its inflation forecast for the 19-country currency union upward to 6.3% from 5.5%. In addition, the ECB has lowered its forecast for GDP growth for 2023 to 0.5% from 0.9% but has left its 2024 forecast unchanged at 1.9%. Moreover, the ECB sees a growth of 1.8% in 2025.
BOE: the central bank remains pessimistic
The Bank of England’s (BOE) monetary policy committee decided to raise the interest rate by 50 basis points during their meeting in December. BOE continues to issue pessimistic forecasts, both individually and in relation to other forecasters. The maximum level of interest rates, however, will not be fixed but rather will be established through a process of discovery.
How long wage pressures and inflation last over the next six months will determine the course of events. But inflation is likely to persist. If that is the case, major central banks would be unable to reduce interest rates for the entire year of 2023, further complicating the economic downturn. It is expected that the GDP in the UK will fall by 1.3% in 2023and then slowly begin to rebound in 2024.
BoJ: no rate hikes expected soon
While most central banks hiked rates numerous times in 2022, the Bank of Japan kept rates unchanged since 2016 at -0.1%. The Bank of Japan is allegedly giving more weight to an inflation gauge that does not include changes in fuel costs. The uptick would demonstrate the Fed’s growing confidence that robust domestic demand will encourage companies to raise prices and sustainably keep inflation near its 2% goal in the years ahead.
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The head of BoJ, Haruhiko Kuroda, has ruled out the idea of an interest rate hike in the near future since the BoJ must maintain its stimulus until the current cost-push inflation gives way to a demand-driven one supported by growing wages.
However, long-term interest rates in Japan have been progressively increasing since the BoJ stunned markets in December by widening the band around its 10-year bond yield aim, a move investors saw as a precursor to a future rate rise.
Overall, assets may get a relief rally in 2023, as most stocks and cryptocurrencies already jumped at the beginning of the year. However, interest rates are projected to remain high, which could lead to a higher unemployment rate, and lower GDP growth but hopefully lower inflation.
This could eventually keep most assets lower until interest rates start to go down. But they are forecast to go lower as far as 2024, so 2023 is shaping to be more bearish than bullish for investors. After a short-term rally, the economic downturn is likely to progress in my opinion. That is why many investors choose to dollar-cost average.