Market Update

Monthly Market Roundup cov. December 2023

Monthly Market Roundup
Key takeaways
1

Buoyed by cooling inflation and expectations for dovish monetary policy in 2024, global equity markets finished an overall upbeat year on a strong note.

2

Federal Reserve chair Jay Powell announced new forecasts pointing to 75 basis points worth of cuts in 2024. Across the Atlantic, investors are pricing in a rate cut from the European Central Bank (ECB) in March 2024.

3

The Chinese equity market moved lower in December as Moody’s cut its credit rating for the country and reports surfaced that borrowers were defaulting on loans in record numbers.

Summary of global markets

Global equity and fixed income markets moved higher in December on growing conviction that major central banks will pivot to more accommodative monetary policy in 2024. US equity markets were notably strong, approaching all-time highs in response to the Federal Reserve forecasting 75 basis points of rate cuts in the next 12 months. Chinese equity markets, on the other hand, continued to be challenged by growth concerns and a flagging real estate sector.

European equity markets wrapped up a strong year by moving higher in December driven by hopes of more accommodative monetary policy from major central banks next year. Real estate, industrials and materials were the best performing sectors over the month, while energy was the only sector to post negative returns as lower oil price weakened the sector.

In line with expectations, the European Central Bank (ECB) kept interest rates at 4.0% for the second consecutive meeting. Although the ECB forecast consumer price growth would continue to decline gradually over the next year, markets are pricing in a rate cut in March 2024.

The flash purchasing managers’ composite index (PMI) for the eurozone fell to 47, below expectations and down from the previous month of 47.6. The index, which measures activity at both services and manufacturing companies across the eurozone, is below 50, indicating businesses are contracting.

While the eurozone inflation rate was at 2.4% in November, close to the ECB’s 2% target, some economists expect a small uptick in the coming months due to some tax changes and a lower basis of year-on-year comparison. 

The UK equity market closed higher in December despite disappointing gross domestic product (GDP) releases. The UK market also closed up for the year, trailing rival markets in Europe and US. 

The Bank of England (BoE) held interest rates at 5.25%, a 15-year high. The Monetary Policy Committee (MPC) said interest rates would be higher for an “extended period of time,” with the governor of the BoE Andrew Bailey adding there was still some way to go before inflation hits its target.

The Office for National Statistics (ONS) figures showed UK inflation, driven by slowing fuel, food and recreation prices, fell sharply to 3.9% in November, down from 4.6%. The bigger than expected fall has brought forward market expectations of a rate cut to the first half of 2024.

UK GDP fell unexpectedly in October, falling 0.3% between September and October due to lower services activity and contracting manufacturing and construction output. 

All three major US indices closed higher in the month, with the Dow Jones and S&P 500 nearing record highs following the US Federal Reserve’s dovish pivot. With US Treasury yields falling and strong labour market data, investors ended the year growing more confident of a possible “soft landing” where the US economy avoids a recession.

US inflation eased slightly to 3.1% from 3.2% and US Treasury secretary Janet Yellen confirmed inflation was coming down “meaningfully.” 

Providing a boost to markets, the Fed kept interest rates on hold at a 22-year high and announced a more dovish forecast, pointing to 75 basis points worth of cuts next year. The decision to hold rates at 5.25% - 5.5% was accompanied by the dot plot, which showed rates at 4.5% -4.75% at the end of 2024.

Asian equity markets rose with all countries registering gains except China. The top performing markets in the region were Australia, India and Singapore. Sector performance was broadly strong with utilities, materials and real estate steering while communication services detracted.

In China, communication services, health care and real estate were the weakest performing sectors, while utilities and information technology registered modest returns. Credit ratings agency Moody’s cut China’s credit outlook, citing risks to growth and a property sector crisis. Concerns about the Chinese economy were highlighted in early December following a report that Chinese borrowers were defaulting on loans at record numbers.

Australian equity markets were the standout performer across the wider Asia-Pacific region with all sectors positive over the period. Third quarter GDP was revised up to 2.1%, and the Reserve Bank of Australia (RBA) elected to keep rates unchanged in in December at 4.35%, in line with forecasts. 

Emerging market (EM) equities finished the month positively but lagged developed markets slightly. EM investor sentiment was bolstered by the belief that interest rates may have peaked in developed markets and that rate cuts in 2024 might be on the horizon. Utilities, information technology and materials drove gains while communication services detracted. Equity markets in Latin America (LatAm) were the best performing regionally with all countries finishing the month positively.

The top performers at a country level were Peru, Colombia and Mexico. Turkey, Egypt and China, lagged their peers over the period. Equity markets in South Korea saw strong sector performances across the board with health care being the standout performer. Indian equity markets also had a solid month in December with all sectors positive.

Growing confidence that leading central banks could cut interest rates in 2024 due to falling inflation rates boosted the performance of global bond markets in December. US treasuries, UK gilts and German bunds returned 3.41%, 5.78% and 3.36% respectively. (ICE BofA data, local currency returns). The strong year-end rally ensured that 2023 was a positive year for sovereign bonds.          

Investor optimism that US borrowing costs are heading lower was bolstered by the Fed’s preferred measure of inflation falling more than expected in November. The cooling inflation rate came after the Fed signalled 75 basis points (bps) of interest rates cuts for 2024, raising hopes that the US economy is set for a soft landing (a cyclical slowdown that avoids a recession).

In contrast to the Fed’s dovish tone, ECB President Christine Lagarde pushed back on imminent cuts to interest rates by reaffirming that borrowing costs would remain at record highs, despite lower inflation expectations. 

Read the full roundup below

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    Monthly Market Roundup cov. December 2023

    By Invesco

    In December’s Monthly Market Roundup, Invesco’s experts unpack the factors that led to another strong month for global equity and fixed income markets.

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