Data source: Bloomberg

The final quarter of 2023 delivered a Christmas present for investors. After the slight reality check in Q3, softer inflation figures from both the eurozone and the US raised hopes that interest rates may not only have peaked, but that cuts could soon be on the way in 2024. Developed markets outperformed emerging markets because of ongoing worries over China’s real estate sector.

 Sources: JP Morgan, Schröder, Bloomberg

In the US

• US shares registered strong gains in the final quarter of the year, buoyed by expectations that interest rate cuts may be approaching. The S&P 500 index ended the year just short of its record high set in early 2022.
• Top performing sectors were those most sensitive to interest rates, including information technology, real estate and consumer discretionary.
• The energy sector posted a negative return with crude oil prices weaker over the quarter.

In the Rest of the World

• The Japanese equity market lagged as investors became concerned about yen appreciation.

• Asia ex Japan equities gained in Q4. Hopes that US interest rates may have peaked led to renewed investor appetite for risk assets across the region.

• In China, shares fell due to investor concerns over weaker economic growth. Taiwan and South Korea were the strongest index markets thanks to their tech stocks and chipmakers that gained as investor enthusiasm over artificial intelligence continued to accelerate

In the US

• The data reinforced market expectations that the Fed has finished its rate hiking cycle and will move towards cuts in 2024. Fed chair Jerome Powell indicated that the central bank was aware of the risk of keeping rates at restrictive levels for too long. Minutes from the Federal Open Market Committee’s latest policy meeting showed policymakers expect rates to end next year at 4.5%-4.75%, down from the current 5.25%-5.5% range.
• The revised dot plot – a chart plotting Federal Open Market Committee (FOMC) projections for the federal funds rate – indicated that three rate cuts are now anticipated for 2024, up from the previously expected two. With more encouraging news on PCE inflation (the Fed’s most watched measure), the FOMC appears more comfortable with the progress made in bringing inflation back towards the target.

In the Rest of the World

• Elsewhere, the Bank of Japan’s decision to make only minor adjustments to its yield curve control policy fell short of market expectations.
• Brazil’s outperformance was driven by ongoing signs of disinflation and the central bank’s resultant reduction in policy rates.
• India gained strongly against a backdrop of moderating inflation and a strong showing for the ruling Bharatiya Janata Party in key state elections.

• The Swedish krona was the top performer among major currencies. Although the Riksbank paused interest rate hikes, the SEK benefited from FX hedging operations conducted by the central bank designed to support the currency.
• The Fed’s pivot towards rate cuts weighed on the US dollar.
• GBP was strong supported by the BoE fiscal policy.
• Digital asset markets performed strongly during Q4 after a quiet period in Q2/Q3. Bitcoin and Etherem returned +57% and +37% respectively, bringing the yearly return to +155% and +91% respectively.

  A main market driver was speculation that a US spot Bitcoin exchange-traded fund (ETF) would be approved by the SEC, with market consensus placing the approval date at the start of January (which happened indeed). 

  2023 will be seen as a transition year for crypto, during which more regulated and strongly backed custodians built out their offerings, off-exchange settlement solutions were ramped up to resolve the counterparty risk issue, and Binance came clean of its wrongdoings.

• The S&P GSCI Index declined in Q4, with price gains for precious metals and industrial metals failing to offset weaker prices for agriculture, energy, and livestock.
• Energy was the worst performing component, with sharply lower prices for natural gas, crude oil, and gas oil. Oil prices fell despite output cuts from Opec+ (the Organization of the Petroleum Exporting Countries, plus some other oil-producing countries).
• Within agriculture, higher prices for coffee, cocoa, soybeans, and wheat failed to offset price declines for sugar, cotton, corn, and Kansas Wheat.
• In industrial metals, nickel and lead prices fell in the quarter, while zinc, copper, and aluminium achieved gains.
• In precious metals, both gold and silver achieved robust price gains in the quarter.

Olivia Markham, BlackRock Portfolio Manager. 

“ We see opportunities in climate resilience solutions offering flood, fire and drought resistance.”

Marko Kolanovic, J.P. Morgan Chief Global Markets Strategist.

“ We think the decline in inflation and economic activity we forecast for 2024 will at some point make investors worry or perhaps panic.”

15-19 Jan: The World Economic Forum, Davos

The World Economic Forum mission is to improve the state of the world by bringing together business and political leaders. Each year, a core number of ministers, heads of state, and business leaders meet at Davos for the forum.

What we can expect: 

Trade, climate change, artificial intelligence will dominate the agenda. This year’s theme will be ‘rebuilding trust‘.

30-31 Jan: FOMC Meetings

The FOMC (Federal Open Market Committee) is the branch of the Federal Reserve that decides on the monetary policy of the United States.

What we can expect: 

FOMC members are projecting a Fed pivot to rate cuts in 2024, forecasting three rate cuts by the end of the year. On January 31, investors will be paying close attention to any commentary from Fed Chair Jerome Powell that could hint at when the Fed believes it is in the clear to begin cutting interest rates.