Financial Markets Overview - December, 2023
Market Analysis
Stellar Capital STELLAR 8 January, 2024

Financial Markets Overview - December, 2023

In December, global stock markets continued their upward trajectory from November, rising 3% in Euro terms. This growth was largely fueled by the narrative of a gentle economic deceleration in the U.S. and the anticipated interest rate cuts from central banks. Stocks in the U.S. and Europe outshined those in emerging markets, mainly due to the underperformance of Chinese equities. The S&P 500 index recorded its ninth consecutive week of gains, marking its longest streak of wins since 2004. Every sector, with the exception of energy, posted gains in December, led by semiconductors, unprofitable technology firms, retail trade, and construction companies. By the month's end, the S&P 500 was just 0.6% shy of its record closing in January 2022. Notably, the broader equity index, represented by the equal-weighted S&P 500, outperformed the standard S&P 500 index by nearly 2%. U.S. small-cap stocks also saw considerable gains.

December's economic reports reinforced the notion of a smooth economic downturn in the U.S. with easing inflation pressures. Job numbers for November exceeded expectations, though the figures for the two preceding months were adjusted downward. Additionally, the yearly rise in average hourly earnings decreased to 4%, the lowest since June 2021. November's inflation matched forecasts, standing at 3.1%. The University of Michigan survey in December also indicated a decline in household inflation expectations for the upcoming year.

Government bonds experienced a rise across the board. The U.S. 2-year yield, sensitive to policy changes, dropped nearly 0.45% to around 4.25% at the year's end. The U.S. 10-year yield fell nearly 50 basis points, settling just above 3.85%. This bond market rebound was propelled by the December Federal Reserve meeting, where it was confirmed that interest rate reductions are planned for 2024. The Fed projected three rate cuts of 0.25% in 2024, and market expectations later evolved to anticipate six rate cuts of 0.25% in 2024. Several Federal Reserve members' speeches post-meeting corroborated this shift in U.S. monetary policy. A similar downward trend in bond yields was observed in the Eurozone, with German 10-year government bond yields falling 37 basis points to 2%. Consequently, Eurozone government bond prices increased by 3.6% during the month. Corporate bonds also fared well in December, registering a 2.7% positive performance, thanks to falling bond yields and narrowing credit spreads.

The U.S. dollar weakened in December, influenced by the Federal Reserve's policy shift and a surprising drop in another U.S. inflation metric. The Euro appreciated against the dollar, crossing the $1.10 threshold with a near 1.5% rise. The yen also gained, driven by declining bond yields in both the U.S. and Eurozone. The Norwegian krone surged nearly 5% against the Euro, following an unexpected interest rate hike by Norway's central bank. The Swiss franc appreciated 2.6% against the Euro, despite the Swiss National Bank maintaining steady interest rates in December. This rise in the franc's value was attributed to a shift in investor expectations regarding the European Central Bank's interest rates, which evolved more significantly than those for the Swiss National Bank.

Gold prices in dollar terms saw a modest increase of 0.7% over the month. However, WTI crude oil prices fell 5.7%, marking the third consecutive month of decline. At one point, crude oil prices even dipped to their lowest since June. Despite geopolitical tensions in the Middle East and Houthi rebel attacks on commercial vessels in the Red Sea, oil prices did not escalate. One factor contributing to the decrease in oil prices was Angola's exit from the oil cartel, driven by disagreements over production quotas primarily set by Saudi Arabia. Angola's departure is expected to marginally boost oil supply, thereby exerting downward pressure on prices.