Was that? After a terrible year for stocks and bonds, the German stock index (Dax) has gained about 9 percent since the beginning of January alone, and in the last three months it has risen about 20 percent. US stocks started more slowly but are showing a positive trend as well. Even Bitcoin and some tech stocks have rallied.

In fact, there are reasons for new hope: The inflation decreases significantly in almost all states. Central banks are expected to at least take a somewhat more relaxed approach to tightening monetary policy. Fears of a recession have not disappeared, but they have decreased significantly, also thanks to the warm weather in Europe. With any luck, the global economy could have a reasonably good year economically, contrary to sometimes bleak forecasts.

But it would be too easy to take an optimistic view of the Economy directly to the markets. Because this shows: After the central banks For years they were investors’ friends, now they tend to be their enemies. And that should also characterize the new year.

confusion in japan

Here is the bank of japan just a special case. she is planning put the yen under pressure, because their expectation management was anything but optimal. The expectation was that interest rates would soon rise in Japan, the last great industrialized country. But then, at the meeting on Wednesday, nothing happened. That led to confusion.

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In the other large central banks, especially in the fed in it USA and European Central Bank (ECB), the problem is different. In times of low inflation, they were always able to bail out stock markets with low interest rates or by buying bonds when things got tough there, ultimately leading to very high valuations.

bank of japan

The central bank has not raised the key interest rate, contrary to expectations.


(Photo: Reuters)

Now, however, high exchange rates are poison for your monetary policy because, conversely, they mean easy financial conditions and thus also fuel inflation. So the risk is high that fed and Co intervene time and time again when optimism in the markets becomes too great.

This applies above all to the US.. Because even though big tech companies are laying off thousands of employees there, the job market is still very tight overall, making it harder to fight inflation.

Market expectations are contradictory anyway. Stock markets are characterized by an excess of optimism. If recession fears arise, they expect monetary policy easing and rise. When fears of a recession subside, they see that as a positive for corporate profits, and they’re rising, too. Furthermore, the stock markets and the bond markets contradict each other.

Because bonds are showing strong reversal, especially in the US, which often heralds a recession. Investment means that the returns on long-term securities are lower than those on short-term securities. This shows that markets expect interest rates to drop, and that usually coincides with or is triggered by a recession.

dangerous contradictions

Such contradictions in market expectations must be resolved at some point and are often accompanied by violent price fluctuations. One possibility is that there is too much optimism in the stock market and too much pessimism in the bond market. That would resolve the contradiction between these areas, but it would at least mitigate the contradictions in expectations within the stock market.

>>Read also: Dax begins long-awaited consolidation: local professionals are in a quandary

In this difficult situation, it is difficult to draw scenarios for the current year. One might look like this: inflation falls as expected, central bank interest rates continue to rise initially, but at a slower pace. The recession will remain moderate and central banks will soon, at least very cautiously, announce a cut in interest rates from the high level. Markets are shaken from time to time because with such divergent expectations, disappointments always crop up somewhere. All in all, 2023 may still be a good year for the stock markets.

In short, such a good scenario would mean that, after several years of crisis, 2023 will be the year in which the crisis will essentially be overcome. With hindsight, the economic damage would be even less than expected in the face of a century-long plague and a Russian war of aggression against a neighboring European country.

However, there are two limitations. Even if the global economy, also supported by China’s opening, gains some traction, the increased national debt will still be a pain in addition to reduced purchasing power due to the high inflation phase. This is not necessarily a mistake: government debt also has the function of absorbing economic difficulties and extending them over a longer period of time. However, that does not change the need to follow a very disciplined financial policy in the future.

But there’s another point: because the stock market has already done pretty well, expectations for the future shouldn’t be set too high. Even if the net result is nothing more than zero as of now, that would be a decent result, especially considering that this year is fraught with geopolitical risk in view of the Ukraine war and China’s threats against Taiwan.

More: What the rise of the Marketmaker Citadel means

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By yjawq

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