Market Notes February 2023

The US stock market underperformed in February, with the S&P 500 losing 2.45% during the month. This decline is explained in particular by Wall Street's reaction to reports of US inflation, which hardly decreased between December 2022 and January 2023. The US consumer price index (CPI) rose from 6.5% in December to 6.4% in January; marking the halt to the cut, suggesting that the Federal Reserve will continue raising key rates in the coming months.
The US unemployment rate reached its lowest level in 50 years (3.4% in January). A labor market where a growing number of companies compete for a decreasing number of candidates, is, according to the Federal Reserve, a vector for increasing inflation. Thus, if wages are increased by current U.S. labor market conditions, it is highly likely that firms will pass on the increase in labor costs to the prices of their products and services.

European stock markets rose in February (+2.55% for the CAC 40, +1.70% for the DAX, and +1.26% for the FTSE 100). This growth was clearly driven by the energy sector (lower natural gas prices and publication of record results).
European inflation, after a slowdown in December and January, resumed its course, reaching 7.2% in February (annualized rate). The ECB (European Central Bank) raised its key rates by 50 basis points (0.5%) in February and indicated its intention to increase them again by 50 basis points in March, confirming its desire to reduce inflation to 2%.

China continues its economic rebound that began in January. In February the CSI 1000 rose by 2.10%; Consumer price inflation remained contained (+2.10% annualized) and manufacturing activity experienced its largest increase in 10 years.
While China's rebound may reduce the chances of a global recession in the short term, we can fear an increase in commodity prices, an aggravating factor of European and US inflation.

Regarding crypto-currencies, the regulatory repression initiated by the FTX saga continues to strike in the United States.
The Stablecoin of Binance's first centralized exchange, the BUSD (Binance USD) is in turmoil following the ban issued by the NYDFS (New York Department of Financial Services) to the company Paxos Trust to issue BUSDs. According to a Wall Street Journal article, the Securities and Exchange Commission (SEC) may sue Paxos for violating investor protection laws.
Coinbase announced on February 23, the launch of its Blockchain Base, an L2 (Ethereum Layer 2, understand a network layer built on top of the Ethereum blockchain). The most anticipated event in the crypto sphere will be in March, the update of the Ethereum network named Shanghai (see our January 2023 market note for more information). If this update goes smoothly, the most cautious investors should start participating in the ETH 2.0 stacking program, which would be a beneficial factor for the Ethereum environment, causing the amount of ETH in circulation to drop (thus decreasing selling pressure).

The year 2023 has begun with a general rebound in the markets, however, inflation and rising policy rates represent a sword of Damocles in the US and European financial markets; They are expected to continue to experience volatility as long as the inflation problem persists.

In conclusion, while markets call for a cautious approach, we continue to affirm the importance of remaining diversified and maintaining long-term allocations of high-quality assets.