Identifying market trends helps people invest with profit and achieve their financial goals. In 2023-2024, the market trends will be influenced by three high-level factors: U.S. interest rates, growing regional competition, and the new energy balance. The OctaFX experts have analysed their possible impact on the world economy.
U.S. interest rates are a litmus test of the world economy
One thing that affects global financial markets is the U.S. economy controlled by the U.S. Federal Reserve (Fed). If the U.S. economy is fine, the dollar weakens, and global capital markets rise. The Fed controls the global economy by changing the key rate, which leads to periods of growth or decline called economic cycles. According to the study by Alan S. Blinder, an average cycle lasts six years and consists of three periods:
- a period of interest rates hikes
- a period of falling rates
- a period of steady rates.
Now the U.S. economy is in a tightening cycle: the Fed started aggressively raising interest rates in March 2022—for the first time since the 1980-s. This might end either with the global growth of stock markets or at least another year of depression and a strengthening dollar. The macroeconomic indicators indicate the second option to be more likely: in 2022, the U.S. inflation reached a 40-year high, and analysts still see the effects of the pandemic and an armed conflict in Ukraine. The IMF, the World Bank, and the WTO agree—the global economy might well end in a recession.
The further Fed’s interest rate decision will affect the global economy, including global inflation, GDP growth, and unemployment data. Now, for the first time in the last 14 months, the Fed has paused its interest rate hikes. If the rates are steady until September, it will be the end of the tightening cycle. Then, investors will push capital markets to new highs making the dollar cheap.
US-China tensions make Asian capital markets more attractive
Asia is taking the stage as the world’s most important economy, pushing the U.S. aside. This process started at the beginning of the 2000-s when emerging economies took the lead over developed countries. Over the past 20 years, Asian countries have doubled their world GDP share, primarily due to China and India, which have entered the global top 5.
Asian countries increase their power with deeper integration in trade, investment, innovation, and knowledge flows. Experts believe Asia will determine the next stage of globalization. At the same time, Asia’s emergence as a competing force creates a conflict with China on one side and the U.S. on the other—the two economies are disconnected. This economic conflict will likely continue in the future.
Considering that Asian markets are well past the recessionary phase, investors are optimistic about its stock market. Moreover, due to the emergence of new currency controls, CNY and INR will tend to strengthen in the long term. Thus, the U.S. dollar is more attractive for hedging in the coming quarter, while the CNY is more attractive by the end of the year.
Natural gas is the bridge fuel of the world
The current stage of the economic cycle is characterised by lower demand for oil and coal. Other energy resources will benefit from increased demand amid forming a new energy balance.
As a result of the Ukrainian conflict, Russia has redirected its oil and gas from Europe to Asian markets. At the same time, the U.S. has sharply increased its exports of liquefied natural gas to Europe. These changes in global trade in 2022 have led to an extreme shortage of energy resources. Consequently, environmental sustainability in energy has become a secondary factor, while reliability and economic efficiency have once again taken centre stage.
The world is going through an energy transition, with natural gas systematically replacing coal and oil. Coal, falling in price, will lose its position due to environmental, technological, and economic reasons. The role of renewables and nuclear power energy sources might increase in the long term, but gas is the only balancing energy source that can guarantee peak demand coverage. Growing demand for it will contribute to its price increase in the 2H 2023 and beyond.
What’s next?
The year 2023 is a turning point for the monetary and financial world. The Fed’s future reduction in interest rates will support the global economy and smooth out the negative effect of economic disconnection between Asia and developed countries. The following two years will be an era of a weak dollar and falling oil systematically losing its position to natural gas.
