Markets are Choppy Looking Forward to 2023 | Daily Market Analysis

Key events:      

• USA – Initial Jobless Claims
• USA – Crude Oil Inventories

Yesterday we could see quite weak activity in the financial markets as traders continue to celebrate Christmas and wait for a new year.

And today markets are definitely feeling the holiday trade: light news flow combined with low liquidity led to uneven but ultimately insignificant movements. It looks very much like we are now just drifting into 2023, which is when things will pick up quickly again.

Key trading themes will continue to dominate in early January, most notably how far central banks are willing to push interest rates to demonstrate their determination to get inflation back to target levels. Many have already started to let rates down, and we are seeing many signs of easing pressure, although perhaps not as much as policymakers would like.

Nonetheless, with a very aggressive tightening in a short period of time and with many countries facing a recession, the risks of a rate hike are now heavily skewed downward. Having started too late, central banks now run the risk of tightening too much and hence compensating for a sloppy start with a painful exit.

Oil prices are winding down their recent gains in mid-week, down more than 2% after a strong recovery over the past few weeks. The outlook for the oil market remains highly uncertain, and the recent G7 sanctions and Kremlin countermeasures make little difference at this point. Both will only be tested if oil prices rise so much that Russian oil trades uncomfortably close to the $60 mark or should be higher, which is not the case right now. So for now, all this is just theory.

Also, China's success in transitioning away from the cruel quarantine may be a clue to all of this, but since reliable data on the spread after the easing of restrictions is hard to come by, we may have to wait a while to fully understand the implications for the economy and therefore oil demand.

Gold is trading around $1,800, a level around which it mostly fluctuated during December. Either it's a reflection of traders not believing in the Fed's hawkish resolve, or the bulls don't want to give up on the recovery rally, but gold continues to hold on, albeit on increasingly weak momentum. We may see a correction early in the new year in the absence of dovish sentiment in Fed comments or favorable economic data.

Bitcoin held steady over the holiday period, and the cryptocurrency community will probably be quite pleased with that. It hasn't been an easy few months, and the next few may prove challenging. For the industry, it has become a matter of limiting the damage and hoping that the storm has passed and that another will not be long in coming.