HYCM’s Market Themes to Prepare for in 2023

The past few years have been challenging for everyone, investor or not. We’ve run the gamut from pandemic and war, to shortages, inflation and the knock-on effects of all of the above. As we bring an eventful 2022 to a close, HYCM would like to highlight some of the market themes to be aware of in the year ahead.

The P-Word

The Fed pivot from hawkish to dovish, or indeed just from hawkish to less-hawkish, has been the primary concern of investors for the entirety of 2022. Even before the Federal Reserve began hiking rates in March of this year, so much of the commentary has centred around how high it can afford to raise rates before the market forces it to pivot to a more accommodative stance.

Fed Chair Jerome Powell has been nothing if not consistent, at least throughout 2022. He told markets that the Fed would be unflinching in his fight against the post-pandemic inflation, and he has steadfastly followed through by embarking on the fastest rate hiking cycle in history.

We’re now probably closer to the end of this tightening cycle than we are to the beginning, which is why the P-word is going to be so important in the months to come. So much so, that even the recent rate hike of 50- instead of 75-basis points, was perceived by certain market participants as dovish.

The thing to keep in mind here is that Powell has repeatedly stated that the US has a long way left to go as far as the country’s fight against inflation is concerned. So, even if the Fed decides to pause the hikes completely, which is expected at some point in the first half of next year, this doesn’t imply that they’ll begin reducing rates immediately.

In fact, Powell has been clear that they may need to keep rates higher for longer. Also, it’s important to note that there can be a lag between the pivot and an ensuing bull market. Pivots tend to precede market bottoms before a new rally ensues. For example, the last bull market commenced at the end of 2020, whereas the Fed pivoted in the mid-2019, and had already reached the zero bound by March of 2020 when the Covid crash occurred. Similarly, during the GFC, the Fed pivoted in the last quarter of 2007, but markets didn’t bottom until 2009.

These are all things to keep in mind as an investor, particularly when trading anything further out on the risk spectrum, such as tech stocks or crypto. Don’t get caught up in the hype. Manage your stops, and question every rally as a bear market bounce until the market proves otherwise.

For our part at HYCM, we will be covering the situation closely on HYCM Lab blog, and continuing to ensure that our investors have access to all the instruments and symbols they require to be able to position themselves accordingly.

Ongoing Energy Volatility

For the commodity traders among you, it appears that ongoing volatility in energy markets is likely to continue into 2023. There are many factors tugging on either side of the supply and demand dynamics affecting crude oil.

Many commentators view elevated crude oil prices throughout 2023 as something of an inevitability. The combination of underinvestment in the sector, low inventories, and supply constraints are likely to be bullish for crude oil prices going forward. The question of a 2023 reopening in China is also one of the unknowns that’s likely to exacerbate supply shortages and lead to elevated prices should it become a reality.

The EU’s recent energy sanctions on Russia, which involve a $60 price cap on Russian crude, have effectively taken one of Moscow’s largest customers for its oil off the market, leading to the bulk of Russian crude finding its way to China, India and Turkey. Vladimir Putin has also threatened retaliatory policies to this embargo, which would include the cutting of oil production. This is another unknown regarding the supply of oil in the near-term. On the OPEC side, we do know that the organisation is reluctant to increase supply, and recently rolled over its previous production agreement among its members.

Technically, crude oil is oversold. On the weekly timeframe a divergence is emerging, with the price making lower-lows, while the RSI has, as yet, failed to break to lower lows. It’s also nearing its 200-week moving average, which it failed to get down to in both August and November of 2021. This level could provide a springboard for a new move higher, particularly if a combination of the above themes begins to line up in the new year.

Finally, there’s an ongoing divergence between the price of crude, and the price of energy stocks. Energy has been the best performing sector of the US stock market in 2022, and some fear that it has gotten a little ahead of itself as investors have aggressively pivoted away from their riskier bets in a higher rate environment.

At HYCM we’re getting ready to make a big announcement in 2023 that will be very interesting to stock investors, as well as give more ways to achieve an appropriately balanced portfolio.

As it stands, this sector is currently respecting its 20-week moving average as support, meanwhile, as noted above, the price of crude is heading down to the 200-week MA. We can expect the gap between the price of the commodity and the stocks involved in it to close. The question remains, in what way? Those bullish on the price of crude in the new year are expecting oil to rise, while some profit taking to commence in the energy sector of the stock market.

Trade with HYCM

Note: Cryptocurrencies are not available for trading under HYCM (Europe) Ltd and HYCM Capital Markets (UK) Limited.

About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd, HYCM Ltd, and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.

High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

*Any opinions made in this material are personal to the author and do not reflect the opinion of HYCM. This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise.