The final quarter of 2022 saw increases in the bond market, lower yields of government debt and the weakening of the US dollar compared to other foreign currencies.
This market behavior was the consequence of the investors measuring the end to Fed interest rate raises between 2023 and 2024, more and more signals of disinflation from the raw material markets, shifting investor expectations from concerns about excessive inflation to discounting recession between 2022 and 2023, and signals for a recovery in 2023. The significant increases in prices of assets as at the end of 2022 were partly caused by the excessively pessimistic assessments in the first three quarters of 2022, after Russia’s aggression in Ukraine caused drastic price surges in the raw material markets and put inflation at a course unseen for 30-40 years, threatening the fall of consumption.
Bond market
The situation on the core markets in 2022 contributed to the increased yields on Polish bonds. Yield curves on most markets rose significantly, as caused by the steep rise in inflation, inflation expectations and considerable interest rate raises as well as main central banks’ announcements that the raises would be continued. As a consequence, over the year, the yield on US 10-year treasury notes rose from 1.498% to 3.831%, and the yield on German 10-year government bonds from -0.179% to +2.562% (Refinitiv).
Equity market
In 2022, the WIG20 index fell by 20.9%, the WIG index by 17.1%, the mWIG40 by 21.5%, and the sWIG80 by 12.8% (Warsaw Stock Exchange figures). The domestic equity market was affected by the pessimistic sentiments following Russia’s attack on Ukraine, and interest rates raises on the part of NBP and the most important central banks worldwide. Growing inflation expectations and troubles with energy fuel supplies also did not help. The negative prospects for the equity market in the second half of 2022 were further exacerbated by the risk of the global economy going into recession, as a reaction to high raw material prices combined with growing interest rates. There was a recovery in the Q4 2022, after the first signs of inflation pressure subsiding and expectations concerning the dynamic of interest rate raises being held back. However, this was not sufficiently strong to recover the losses made in Q1–Q3 2022.
Most of 2022 saw declines in global equity markets caused by concerns about the adverse impact of the Russian aggression in Ukraine on prices of and access to energy fuels and food materials, as well as the discounting of tightened monetary policies.
There was some rebound in Q4 2022, not enough, however, to fully recover the losses. In effect, in 2022, the American S&P500 stock index fell by 19.4% (S&P), while the German DAX index by 12.3% (Deutsche Boerse). Inflation, at levels unseen since the 1980s, high short-term interest rates and yields discouraged investors from buying stock. Asian indices also fared badly, where the aforementioned problems were exacerbated by fears of further lockdowns; this caused a 15.5% decline in the HSI index over the year.
Currency market
Over 2022, the EUR/PLN exchange rate grew from 4.58 to 4.69 (Refinitiv), whereas USD/PLN from 4.03 to 4.38 (Refinitiv), The weakened zloty was a reaction to the growing geopolitical risk after the Russian attack on Ukraine. Drastic interest rate raises in Poland only weakened the depreciation of the zloty in relation to major currencies. The reduction in value of the Polish zloty and currencies of emerging markets was additional driven by the stronger and stronger US dollar due to the Fed’s tightened monetary policy (interest rate raises and balance sheet reduction). This was reflected in a shift of the EUR/USD exchange rate to 1.07 as at the end of 2022 from 1.14 as at the end of 2021 (Refinitiv).
Polish zloty against Swiss franc grew from 4.42 as at the end of 2021 to 4.72 as at the end of 2022 (Refinitiv). The lower value of the Polish zloty compared to the franc derived from the increased rate between EUR and PLN and decreased rate between EUR and CHF (from 1.04 as at the end of 2021 to 0.99 as at the end of 2022 – Refinitiv), as caused by geopolitical tensions.