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Article | 05 January 2024 | Investments
Global equities rallied, with the MSCI World Index rising 4.8% in local currency terms, on growing optimism for interest rate cuts in 2024. US stocks were among the strongest performers with the broad-based S&P 500 Index gaining 4.4% while the tech-heavy Nasdaq Composite Index jumped 5.5%. European shares also moved higher, with the EuroStoxx 50 Index climbing 3.2%. Japanese shares proved the exception, with the TOPIX sliding 0.4%, weighed down by speculation that the Bank of Japan might soon start to move away from its ulta-accommodative stance. Chinese equities also declined (MSCI China Index -2.6%) as the authorities cracked down on the gaming sector.
Global bonds continued to advance, with the 10 year US Treasury bond rising 4.2% while the 10 year German Bund returned 3.5%. In the US, the yield on the 10 year Treasury bond closed December around 3.9%, a level last seen in July, while the 10 year German Bund traded at a one year low of below 2.0% as investors priced in lower rates in 2024. Corporate bonds outperformed government debt in the US, but lagged in the eurozone.
The Japanese yen strengthened over December on growing speculation that the Bank of Japan (BoJ) would soon tighten monetary policy. In contrast, the US dollar weakened against the euro as the Fed pivoted to a more dovish stance, with US policymakers forecasting that rates might be cut in 2024.
Oil prices closed a volatile month lower, with Brent crude losing 7% to end at $77 a barrel. Rising concerns over attacks in the Red Sea caused BP to halt all shipments via the Suez Canal, but oil prices subsequently weakened after Angola left OPEC, citing concerns over the organisation’s ability to settle disputes over production quotas. Gold hit a record high during the month, closing December 1.3% higher at $2,063 a troy ounce.
Volatility slid 3.6% December, with the Vix Index closing at 12.5, remaining below the 20 level which is usually viewed to be an indicator of market stability, given growing hopes that the US economy would manage a soft landing.
The COP28 summit in Dubai ended in an agreement for countries to “transition away from fossil fuels in energy systems.” While this is the first time that fossil fuels have been mentioned in COP decisions, the announcement departed from earlier stronger language to "phase out fossil fuels" entirely.
The US Federal Reserve (Fed) pivoted to a more dovish stance, with Fed chair Jay Powell indicating that US rates were now “likely at or near” their peak for this rate-hiking cycle. US policymakers are now forecasting 75 basis points of rate cuts in 2024, with more to follow in 2025.
Given weak growth in the eurozone, where inflation is almost back to target, expectations grew that the European Central Bank (ECB) would also reduce borrowing costs in 2024. ECB members acknowledged that rates were unlikely to rise further, but warned it was too early to declare victory in the fight against inflation.
UK inflation slowed more than expected in November, falling to a more than two year low of 3.9%. The news boosted hopes that the Bank of England would be in a position to join other major central banks in cutting rates in 2024.
China fell deeper into deflation in November, with consumer prices dropping 0.5% year on year. The authorities are widely expected to take steps to boost growth, including interest rate cuts from the People’s Bank of China.
Expectations are growing that the BoJ will soon end its ultra-accommodative stance. But, with inflationary pressures easing and other major central banks now expected to lower rates in 2024, has Japan left it too late for any meaningful tightening of monetary policy?
After a strong rally, equity and bond markets might have fully priced in rate cuts in 2024, leaving themselves vulnerable to disappointment near term, if inflationary pressures increase again or economic growth outstrips expectations.