Weekly Markets Review

11th December 2023

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Markets last week

The rally that started in November lost a little bit of steam coming into this month, but the momentum is still generally positive with most major markets finishing slightly up. Global equities kicked off December with a gain of 0.9% taking the year-to-date return to 12.8% in GBP terms.

This year equity markets have been characterised by their narrowness with only seven stocks contributing to almost all of the entire global market return. This ‘the bigger the better’ trend has reversed since the start of November and continued in force last week.

European equities were the best performing market, up 2.4% over the week, aided by the dovish tone struck by the European Central Bank (ECB) and the shift lower in European bond yields. One of the most hawkish members of the ECB Governing Council, Executive Board member Isabel Schnabel, described the fall in inflation in Europe as “unexpected” and “remarkable”. It was only a month ago when Schnabel refused to rule out another interest rate hike. When she was asked if she had changed her mind, she quoted the famous economist John Maynard Keynes saying “when the facts change, I change my mind. What do you do sir?”. This change of tack led investors to ramp up bets that the ECB will be the first major central bank to cut rates next year. The move in European bond yields in the past month has been historic with the 10-year German bund yield falling from a peak of 2.97% in early October to a low of 2.19% last week. Italian bond yields have also fallen sharply from a peak of 4.44% at the end of October to 3.41% last week.

There was a reversal in FX trends as sterling lost ground falling 1.3% vs the US dollar. Throughout November the strength of sterling eroded the gains that international equities made in their local currencies. For example the US equity market was up 9.1% in November in USD terms but only 5.1% when converted back into GBP. Last week this reversed as US equities were up only 0.2% in US dollar terms but gained 1.4% in sterling terms.

The biggest trend reversal has been in the Japanese yen which strengthened 1.3% vs the USD and well over 2% vs GBP. The JPY has been weak year-to-date as the Bank of Japan (BoJ) has persisted with their tremendously accommodative policies of yield curve control (YCC) and negative interest rates. Up until last week the yen had weakened over 15% vs sterling for the year-to-date. Comments from BoJ officials, including Governor Ueda, suggested a potential earlier-than-expected shift in their ultra-accommodative policy approach, with the removal of negative interest rates possibly following any lifting of the BoJ's YCC policy. Last week Japanese equities fell 2.4% in yen terms but gained 0.1% in sterling terms. The Japanese yield curve also steepened over the course of the week following these comments.

Chinese equities fell following Moody's credit downgrade of China's sovereign debt, highlighting concerns about its economic outlook. Pro-growth measures from Beijing are yet to revive the economy, and sentiment remains bearish. Despite positive signs in services activity, trade data showed a mixed picture with a rise in exports but unexpected falls in imports.

US economy

It was a busy week on the economic calendar in the US. Friday’s closely watched nonfarm payrolls report surprised modestly on the upside and the unemployment rate also surprised by falling back to 3.7% from a two-year high of 3.9% in October. The bigger surprise—and the bigger market reaction—seemed to be the University of Michigan’s preliminary gauge of consumer sentiment in December, which jumped to its highest level since August on calming inflation fears. On the downside job openings in October came in much weaker than expected at 8,733k vs consensus expectations of 9,300k. Overall data during the week painted the US economy in a sturdy light.

Commodities

Commodities were weak with oil (Brent) falling 3.9% and gold falling 3.3% in USD terms. Oil has fallen on the back of the supply outlook. Despite OPEC cuts there seems to be no shortage of supply; Iranian crude production has hit a five-year high and sanctions on Russia seem to be having no effect (Russia’s income from oil exports is greater today than it was before the invasion of Ukraine). The US has also eased sanctions on Venezuela.

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The Week ahead

Tuesday: US Consumer Price Index (CPI)

Our thoughts: Inflation is heading in the right direction according to most metrics including the Federal Reserve's (Fed) preferred measure, the Personal Consumption Expenditures index. Nonetheless the November CPI release just before the Federal Open Market Committee (FOMC) meeting will be closely watched. Headline CPI is expected to come in at 0% on a month-on-month basis, the same as the October reading, whereas year-on-year inflation is expected to fall from 3.2% to 3.1%.

Wednesday: FOMC rate decision

Our thoughts: Financial conditions in the US have loosened since the last Fed meeting at the start of November. This time around Fed Chair, Jerome Powell, will be cautious not to sound too dovish during the press conference to prevent further excessive easing, however given that the evidence points to some slowdown in economic activity and with inflation moving in the right direction the FOMC discussion may well be more dovish internally. The framing of the narrative around US monetary policy has certainly shifted away from further hikes and towards potential cuts.

Thursday: Bank of England (BoE) rate decision

Our thoughts: The BoE is likely to keeps rates on hold at 5.25%. Services inflation remains elevated and the 2% target for headline inflation remains some distance away. The Purchasing Managers Index (PMI) data for the fourth quarter has so far also surprised to the upside and recovered from previous readings. Altogether this shows that the UK private sector is stronger than economists had anticipated. Given the early signs of economic recovery in the fourth quarter the BoE is likely to want to keep rates firmly in restrictive territory.

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Markets for the week

In Local Currency In Sterling

Index	Last Week	YTD	Last Week	YTD
UK
FTSE100	0.3%	1.7%	-0.3%	1.7%
FTSE250	2.7%	1.9%	2.7%	1.9%
FTSE All-share	0.7%	1.7%	0.7%	1.7%
US
US equities	2.5%	22.9%	1.2%	17.0%
Europe
European Equities	0.6%	19.9%	0.7%	16.3%
Asia
Japanese Equities	0.3%	23.3%	1.0%	8.3%
Hong Kong Equities	2.8%	-15.1%	1.6%	-19.2%
Emerging Markets
Emerging Market Equities	-2.7%	4.7%	1.4%	-0.4%
Government Bond Yields*		Current Level	Last Week	YTD
10-year Gilts		3.69%	-35	1
10-year US Treasury		3.91%	-31	4
10-Year German Bund		2.02%	-13	-56
*Yield change in basis points
Currencies		Current level	Last week	YTD
Sterling/USD		1.2681	1.1%	4.9%
Sterling/EUR		1.1637	-0.2%	3.0%
Euro/USD		1.0895	1.2%	1.8%
Japanese Yen/USD		142.15	2.0%	-7.8%
Commodities (USD)		Current level	Last week	YTD
Brent oil (bbl)		76.55	0.9%	-10.9%
WTI oil (bbl)		71.43	0.3%	-11.0%
Copper (metric tonne)		8549	1.2%	2.1%
Gold (oz)		2019.62	0.7%	10.7%

Sources: FTSE, Canaccord Genuity Wealth Management

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Your weekly market review was powered by Canaccord Genuity Wealth Management (CGWM)

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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable. Past performance and future forecasts figures are not a reliable indicator of future results.