Monthly Market News December 2023 - Trends in the market.

Alexandre Gauthy - Economist

The Fed's long-awaited "pivot" was announced in mid-December. This allowed equity markets to rise further at the end of the year while bond yields fell.

Our expert, Alexandre Gauthy, analyzes December 2023 market trends.

Equity markets: year-end boom continues into December

Global equities rose 3% in euro terms in December, continuing November's stock market rally. The rise in equities was mainly driven by the soft-landing narrative of the U.S. economy and expectations of interest rate cuts by central banks. U.S. and European stocks outperformed emerging market equities, which suffered from the negative performance of Chinese stocks. The S&P 500 index closed December higher again after nine weeks of consecutive gains, resulting in the longest winning streak since 2004. All sectors except energy posted a positive performance in December. The best-performing sectors were semiconductors, loss-making technology companies, retail trade and construction companies. The S&P 500 ended the month only 0.6% below its January 2022 closing record. Gains in the broad equity index also outpaced the "Magnificent 7," as the equal-weighted S&P 500 outperformed the S&P 500 index by nearly 2%. U.S. small-caps also posted solid gains in December. Last month's economic data confirmed the scenario of a soft landing for the US economy and easing inflationary pressures. November's employment figures were better than expected. Nevertheless, figures for the previous two months were revised downward, while the annual increase in average hourly earnings fell to 4%, the lowest level since June 2021. November's inflation figures were in line with expectations. U.S. inflation stood at 3.1% in November. What’s more, the December University of Michigan survey pointed toward a decline in household inflation expectations for the next 12 months.

Bond markets: interest rates dropped in December

Government bonds rose across the curve. The policy-sensitive U.S. 2-year rate fell nearly 0.45% to about 4.25% at year-end. U.S. 10-year yield fell nearly 50 basis points to just above 3.85%. The rebound of the bond market was supported by the December Fed meeting, which ended with confirmation that the Fed would cut interest rates in 2024. The median of Fed members' projections came to three expected rate cuts of 0.25% in 2024. The Fed's change in direction prompted investors to further adjust their expectations for interest rate cuts in 2024. In late December, the market was expecting six interest rate cuts of 0.25% in 2024. A number of speeches by Fed members after the December meeting confirmed the reversal in U.S. monetary policy. This downward movement in bond yields was also seen in the euro zone, where the yield on German 10-year government bonds fell 37 basis points to 2%. Eurozone government bond prices rose 3.6% during the month. December was also a good month for corporate bonds, which recorded a positive performance of 2.7%. Both falling bond yields and narrower credit spreads contributed to this positive performance.

Foreign exchange: the US dollar loses ground

The US dollar depreciated in December due to the “Fed’s pivot” and the surprising drop in another U.S. inflation measure. The euro ended the month almost 1.5% higher against the dollar, breaking the $1.10 barrier. The yen rose in December, boosted by falling bond yields in the U.S. and the euro zone. The Norwegian krone rose nearly 5% against the euro last month due to the Norwegian central bank's unexpected interest rate hike. Finally, the Swiss franc rose 2.6% against the euro despite the Swiss National Bank's decision to leave interest rates unchanged at its December meeting. This appreciation of the franc against the euro can be attributed to a change in investor expectations regarding interest rates. In December, investors adjusted their expectations of ECB interest rates more strongly than those for the Swiss National Bank. This evolution supported the Swiss franc.

Commodities: little impact of Middle East conflict on oil prices

Gold prices rose 0.7% (in dollar terms) over the month. The price of WTI crude oil fell 5.7% in December. It marked the third monthly decline in a row and at one point the price of crude oil even reached its lowest level since June. The geopolitical situation in the Middle East and Houthi rebels' attacks on commercial cargo ships in the Red Sea failed to push oil prices higher. One of the reasons why oil prices fell during the month is Angola's departure from the oil cartel, which was motivated by disagreements over production quotas imposed mainly by Saudi Arabia. This departure is likely to increase oil supply at the margin, which weighed on oil prices.

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