The numbers for the week – 08 Jan 24

The numbers for the week – 08 Jan 24

Markets last week

Markets started 2024 with a hangover following their Christmas bonanza. Global equity markets returned -1.6% in the first week of the year with the US technology sector being the most prominent area of weakness. Asian equities struggled with Chinese equities falling -3.3% and Hong Kong equities declining -2.7%.

The US equity market fell -1.2% in sterling terms last week, with the technology sector down -4.2%. Typically defensive sectors which performed poorly last year, such as health care and utilities, bucked the downward trend and ended in positive territory, up 2.0% and 1.8% respectively as the market dynamic took a more cautious turn.

The UK equity market saw a similar pattern falling -0.8%, with defensive sectors outperforming. Health care was the best performing sector, rising 2.4%, utilities gained 1.1% and consumer staples were up 0.7% for the week.

Worrying escalations of geopolitical tensions in the Middle East and North Africa outstripped the impact of swelling oil inventories driving oil prices higher. Brent crude rose 2.2% to finish the week at $78.76 a barrel. Rising oil prices set the tone for energy stocks too as the sector finished the week up 0.4% in the UK and 1.0% in the US.

Bond markets had a tough start to the year after a bumper fourth quarter 2023. Global bonds had the best two month gain since 1990 in November and December but lost ground in the new year. Last week the global bond index hedged to GBP fell -0.8%.

Losses were seen in both corporate and sovereign bond markets but only a pinch of the gains from the last two months have been given back. The global credit market for instance remains valued about a trillion dollars higher than it was at the lowest point near the end of October 2023.

Corporate issuers have rushed to take advantage of the move lower in yields leading to a spike in issuance with almost $23bn of non-financial corporate bonds issued in the first two days of the year in the US and almost €5bn in Europe.

Credit spreads widened on Wednesday by the most in a single day since the banking crisis of March last year. US high yield spreads were trading at 3.1% towards the end of the year but lost territory last week widening to 3.5% (credit prices fall when spreads widen).

The move higher in Government bond yields in the last week has partially been driven by investors simply repositioning in the new year however there have been fundamental drivers:

1) The minutes from the Federal Reserve’s (Fed) December meeting set a slightly more hawkish tone than that of Fed Chairman Jerome Powell during the press conference in December, as they ‘reaffirmed’ that the Fed would maintain rates in restrictive territory until inflation had cooled more substantially

2) The US employment report was stronger than expected with 216k new jobs beating the consensus expectation, wage growth also exceeded expectations and the unemployment rate came in lower than expected.

These factors challenged the interest rate cut narrative that dominated markets in the run up to Christmas, and as a result US Treasury yields reverted higher last week. The 10-year Treasury yield rose to 4.05%. Fed funds futures moved to price in one less interest rate cut for the year from six to five and halved the probability of a cut in the first quarter.

Sovereign yields in Europe rose in sympathy with the US. The 10-year bund yield rose from 2.02% to 2.16%. Headline inflation in the Eurozone rose to 2.9% in December but this was largely due to base effects from the one-off gas price break the year prior. The components of inflation in Europe remain on a downward disinflationary trajectory and although the higher headline figure is bad optically the data under the bonnet is less of a concern. Despite the relative weakness of the Eurozone economies the European Central Bank has been more cautious than the Fed on signalling potential easing this year.

The week ahead

Thursday: US Inflation

Our thoughts: Headline inflation is forecast to rise to 3.2% year-on-year in December from 3.1% in November. Importantly, however, core inflation is expected to soften to 3.8% from 4.0%. For the headline figure the biggest driver of disinflation in recent months has been the fall in energy prices but the recent rise in gasoline prices has put an end to this trend. With core inflation continuing to fall the US remains on the right track. With aggressive rate cuts now priced in for this year there are risks to any upside surprises on inflation and the data this week will be a key driver of sentiment.

Friday: China inflation and trade data

Our thoughts: Next week reveals the first significant insights into China’s recovery for 2024. Forecasts anticipate that China will remain in deflation for the third consecutive month. Additionally, soft trade and credit data is expected to underscore the overall weakness in demand both domestically and in export data. Weak reports are likely to strengthen the case for increased policy support to stimulate China’s wailing economy.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management



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