Developed market equities moved modestly higher in January on the back of strong performance from the technology sector and continued optimism that central banks will begin cutting interest rates later this year.
Global bond markets, however, were held back by central bank warnings that interest rate cuts are not likely to arrive as soon as previously expected.
Emerging market equities were challenged by ongoing economic weakness in China and rising geopolitical concerns in the Middle East.
Less dovish expectations around monetary policy had an outsized impact on market behaviour during the month of January. Both the Federal Reserve and European Central Banks indicated rate cuts are likely to commence later than they had previously insinuated. Developed equity markets were nonetheless able to register modest gains due to stronger than expected economic data and strength in the technology sector. Emerging markets, however, were challenged by underperformance in China and rising geopolitical concerns in the Middle East.
European equity markets moved slightly higher in January, but with a large degree of variation between sectors and stocks. The technology sector delivered returns in the high single digits as AI bullishness was once again to the fore. Communication services also performed well, financials were broadly in line, and cyclical sectors underperformed and gave back some of their strong fourth quarter returns. Materials, energy, and utilities were among the laggards.
The eurozone’s headline and core Inflation rates both edged down in January, with headline inflation falling from 2.9% in December to 2.8% in January. The eurozone economy barely avoided a technical recession and was stagnant in the final three months of last year. Growth was held back by shrinking German output and stalled French growth that offset a stronger than expected rebound in Spain and Italy.
The UK equity market closed lower in January following a surprise uptick in inflation and disappointing retail sales data. The Office for National Statistics (ONS) figures showed UK inflation rose unexpectedly to 4% in December, up from 3.9% in November. The reading was driven higher by increases in alcohol and tobacco prices. Following the inflation news, markets have scaled back expectations on when they believe the Bank of England will start cutting interest rates.
UK GDP grew by 0.3% between October and November, bouncing back from the fall of 0.3% between September and October. This was driven by retail, car leasing, and computer game companies, as well as fewer strikes. The latest data brings optimism that the UK avoided contraction in the final quarter of 2023. UK wage growth slowed in the three months to November, while consumer confidence rose for the third consecutive month according to a survey done by research group GfK.
US equity markets had a positive month in January with all three major indices (S&P 500, Dow Jones Industrial Average, and Nasdaq Composite) registering gains. Towards the end of the month the positive sentiment waned slightly when the Fed indicated that rate cuts in March were unlikely. In the Fed’s January 31st meeting it elected to keep interest rates unchanged at 5.5%.
US CPI inflation for December rose from 3.1% to 3.4% which was higher than the 3.2% forecast, dimming market expectations that US interest rates would be cut as soon as March. The US economy grew by 3.3% in the fourth quarter of 2023, significantly more than the 2.0% figure that economists had forecasted. The US labour market also showed some resilience with the unemployment rate staying at 3.7%.
Asian equity markets broadly fell in January due to weakness in China and Korea. The top performing markets in the region were Japan and India, which both registered gains. Materials, consumer discretionary and consumer staples sectors fell significantly during the month, while energy was the stand-out positive contributor.
Chinese equity markets declines were led by the consumer discretionary, communication services and information technology sectors. Energy provided a positive return and was the best performing sector. Equity markets in South Korea saw the weakest sector performance in information technology, industrials, and materials. Indian equity markets delivered a solid month with energy, information technology and industrials performing positively. Japanese and Australian equities also had a positive month.
Emerging equity markets struggled relative to developed markets due to disappointing economic data in China. Equity markets in Latin America also had a slow start to the year, with Chile and Brazil—the largest and most important economy in the region—registering negative returns for the month. Colombian and Peruvian equity markets were broadly flat. With a monetary easing cycle in most countries in Latin America, there could be support for both economic activity and asset prices. In addition to this part of the economic cycle, the whole region is benefitting from being somewhat isolated from global geopolitical conflicts, with Mexico being a key beneficiary of shifting global supply chains.
A key change since the turn of the year in emerging markets has been on the geopolitical front, with tensions in the Red Sea raising fears of a bigger regional conflict. This raised concerns around the economic implications of higher oil prices and import costs.
Global bond markets lost ground in January as investors heeded warnings from central banks that while interest rate cuts are coming, they are not imminent. US treasuries, German bunds and UK gilts returned -0.18%, -0.72% and -2.40%, respectively. US and euro investment grade and high yield bonds recorded modest gains.
A sense that the US Federal Reserve is not yet ready to slash interest rates was reinforced by remarks from Fed Chair Powell that a cut in March is unlikely. Across the Atlantic, ECB President Lagarde said it was premature to discuss rate cuts since price pressures have not been fully extinguished and many wage negotiations have yet to conclude. Expectations that UK interest rates will be cut this year remain in place despite an unexpected uptick in the inflation rate.
Monthly Market Roundup cov. January 2024
In January’s Monthly Market Roundup, Invesco’s experts describe the wide-reaching impact of central bank warnings that interest rate cuts aren’t likely to begin as soon as previously expected.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
All information is provided as 31 December 2023, sourced from Invesco unless otherwise stated.
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