Markets last week
It has been a mixed start to the year for markets, with global equities now down -0.3% year-to-date. Last week was better than the first week of the year, with the biggest market, the US, finishing up 1.7% (in GBP terms). UK equities were down slightly, falling 0.7%. Japan had a particularly strong week, finishing up 4.2% in Japanese yen (JPY) and 3.9% in GBP terms. Weakness in Chinese and Hong Kong equities continued, with the Hang Seng index falling again last week by 2.0% – taking year-to-date losses to 4.6% (in GBP).
The sluggish performance of Chinese stocks has led some investors to pivot towards other markets in Asia and Latin America. Notably, Japanese equities have reached their highest levels since 1990, propelled by the country’s successful emergence from deflation and efforts by Japanese authorities to enhance shareholder value. Improvements in corporate governance and a shift from deflation to inflation present a positive outlook for the nation’s stock market. The weak yen further contributes to the optimistic sentiment, as it boosts corporate earnings for Japanese companies with significant overseas sales.
This contrasts with the 5.0% decline in Chinese equities (in GBP terms) year-to-date, and the $3.4bn of foreign investor outflows seen from Chinese equities in December 2023 alone. Chinese trade data on Friday provided further evidence that China is grappling with trade challenges. The economic downturn in several of China’s trading partners, combined with heightened geopolitical tensions, has resulted in the first fall in Chinese exports since 2016. Soft trade data and weak domestic data has prompted economists to advocate for increased policy support from the Chinese government.
Global bond markets were muted, delivering 0.5% (GBP hedged). US Treasury yields fell slightly, whilst UK Gilt and German Bund yields rose. The US 10-year Treasury yield finished the week at 3.9%, whilst the 10-year gilt yield closed the week at 3.8%.
US inflation for December came in slightly hotter than expected on Thursday. Headline inflation came in at 3.4% year-on-year vs consensus expectations for 3.2%. Inflation has risen from 3.1% in November. Sticky core inflation was slightly higher than expected but is still moving in the right direction, falling from 4% in November to 3.9%. Importantly, services inflation seems to be cooling, thanks to some normalisation in the labour market. Although the journey back to the Fed’s 2% target could be bumpy, so long as the jobs market continues to soften and wage growth pressures subside, inflation is likely to remain on the right track facilitating rate cuts later this year.
Earnings season, where companies report their earnings for the prior quarter, kicked off on Friday, with several banks starting the proceedings. Next week will see a broader array of companies report. Analysts aren’t optimistic about earnings growth in the fourth quarter, projecting the slowest rate of growth since 2020. Their projection for 11% growth in 2024, however, is much more ambitious. Investors will be paying close attention to the guidance from companies looking for indications on whether this relatively high hurdle is realistic. Profit margins will be a key area of focus in an environment where rising input costs, including wage inflation, are expected to have eroded profitability in the fourth quarter. There is a wide variability in expectations across different sectors, with utilities and communications services expected to have expanded profits by over 40% in the US whilst energy, healthcare and materials are expected to have experienced profit contraction.
The week ahead
Tuesday: UK labour statistics
Our thoughts: Jobs data released on Tuesday is expected to show easing wage pressure. The Office for National Statistics is set to resume the publication of the Labour Force Survey this month after a temporary suspension due to a low response rate. Preliminary data during the suspension indicated a steady unemployment rate at 4.2% since spring 2023, and while official data is not expected to drastically differ, there is a perceived risk of a potential increase in joblessness towards the end of last year. Projections indicate a continued sharp decline in wage gains which, if this turns out to be the case, would provide further evidence of easing price pressures for the UK economy, particularly within services – key for the core measure of inflation.
Wednesday: UK inflation
Our thoughts: Inflation in the UK is expected to ease slightly from 3.9% in November to 3.8% in December. Economists expect price pressure to soften in most categories including food, services and core goods. Given the headline figure is likely to be driven by the more volatile factors, the focus has shifted to the stickier core measures of inflation to gauge the broader trend. With core inflation expected to soften slightly too, the UK seems to be on the right track to bring inflation back towards the 2% target later this year.
Thursday: European Central Bank minutes
Our thoughts: The European Central Bank (ECB) minutes will be closely scoured for any signs of when the ECB might start cutting rates. Christine Lagarde, the ECB President, has been more cautious than her US counterpart Jerome Powell in terms of entertaining the idea of rate cuts, despite the relative weakness of the Eurozone economies. The minutes from the ECB’s December meeting will provide an insight into whether there are any shifting opinions on the ECB’s Governing Council.
The numbers for the week
Sources: FTSE, Canaccord Genuity Wealth Management