Daily Management Review

Global Markets Are At Their Best Level In More Than A Year As Expectations For A Rate Decrease Remain Strong


With year-end confidence high on expectations that major central banks including the U.S. Federal Reserve will start slashing interest rates early next year, global equities surged to their highest levels since late 2022 on Wednesday.
A day after the S&P 500 reached its highest intraday level since January 2022, U.S. stock futures remained unchanged. European stocks saw a slight increase, but overall trading was muted due to the region's public holidays on Monday and Tuesday.
Data revealed that although lacklustre demand continued to restrain expectations for company expansion, China's industrial earnings saw double-digit improvements in November, supporting requests for greater macro policy support.
Although MSCI's broadest index of Asia-Pacific equities outside of Japan increased more than 1% to reach a four-month high, the world market index set a record high more than a year ago and is up 4.5% in December.
"We still have strong equity markets and that is likely to hold through to New Year," said SEB chief economist Jens Magnusson.
The euro reached over four-month highs versus the dollar due to a risk-on attitude in global markets, but oil prices fell after several large shippers went back to the Red Sea, which was impacted when the Houthi rebel group in Yemen started attacking ships earlier this month.
With Maersk shares falling more than 4.5% and other shipping stocks falling, a portion of this month's gains, which were fueled by hopes that a halt to activity in the Red Sea would increase rates, were lost.
In the first trading day following the Christmas and Boxing Day holidays, the Nikkei in Japan increased by more than 1%, while the Hang Seng Index in Hong Kong saw a 1.7% increase. Chinese blue chips had a meagre 0.35% increase.
According to the CME FedWatch tool, market pricing currently indicates a more than 80% possibility that the Fed would likely start reducing rates in March of next year, with more than 150 basis points of easing factored in for the entire year 2024.
A significant portion of the year, according to Tim Murray, a capital markets strategist in T. Rowe Price's multi-asset business, had been spent worrying that rate increases would plunge the country into a recession.
"Happily, that did not happen, and a more dovish Fed means the likelihood of recession in 2024 has fallen considerably," he said.
The dollar continued to lose ground in the currency markets, hovering at a five-month low in relation to a basket of other currencies.
The dollar was 0.1% stronger against the yen at 142.51 after the release of minutes from a Bank of Japan policy meeting earlier this month, while the euro hit its highest level since August at $1.1055.
The minutes reveal that there is still disagreement among BOJ policymakers on whether and when the central bank should abandon its extremely loose monetary policy.
U.S. WTI oil futures dropped 0.5% to $75.37 and Brent oil futures declined 0.2% to $80.89 per barrel, retreating from their respective one-month highs set the previous day.
Tuesday saw a more than 2% increase in oil prices as concerns over potential interruptions to transport arose from new attacks on ships in the Red Sea. However, big maritime companies like Maersk and CMA CGM of France said that they were going to start travelling through the Red Sea again after sending an international task force to the area.
According to Magnusson of SEB, his primary hypothesis was that shipping disruptions would be transient, even though there was a chance of longer-term problems.
"It is something to keep an eye on from an inflation perspective as we know now what disturbances in global transportation can do to inflation," he added.
"It's not my main scenario but there is a tail risk of escalation and that's something that could impact risk appetite."
Iran refuted on Monday an American allegation that a chemical ship in the Indian Ocean had been hit by a drone that was fired from Iran.