Monthly Market Commentary - December 2024

Macro outlook

What’s happened:

The US election dominated the narrative last month as Donald Trump’s victory, along with Republican control of both houses of congress, was well received by financial markets. Stocks enjoyed a strong month in the expectation of a significant fiscal stimulus through tax cuts and government spending. Bonds also gained, as the nomination of Scott Bessent for Treasury secretary reassured investors. Bessent, a hedge fund manager who previously worked for George Soros, is seen as a market-friendly option and has previously spoken out against a maximalist approach to trade tariffs.

Politics has been at the forefront of investors’ minds in Europe too, with the French parliament voting to remove Prime Minister Michel Barnier over his proposed deficit-cutting budget. The administration collapsed after the rejection of plans to reduce France’s burgeoning deficit — which is expected to reach 6% of GDP this year — via €60bn of tax increases and spending cuts. Germany is also experiencing political instability after the collapse of chancellor Olaf Scholz’s coalition.

The surprise fall in UK inflation to below the Bank of England’s (BoE) 2% target for the first time in over three years, proved short lived. The consumer price index jumped to 2.3% in the 12 months to October 2024, up 0.6% compared to the prior month. Energy prices take some of the blame after the Ofgem price cap on household bills lifted by nearly 10% last month, but other areas including the services sector have also contributed to the uptick. Meanwhile the retail sector has also warned of potential inflationary pressures in the near future as a result of measures announced in the budget. A move back near the highs seen in recent years seems unlikely at present but price pressures are proving a bit stubborn in returning consistently back below the BoE target.

US employment data rebounded in November with 227k jobs added. Coming after October’s weak reading of 36k (revised up from an initial estimate of 12k) due to storms and strikes, the latest figure represents a pleasing improvement. However, the bounce back is due in part to the previous month’s disruption as many workers that would have been added in October were seen in November’s data. Compared to a 251k average of the past year the last two months do still represent something of a slowdown in hiring, even if the decline is not as drastic as October’s release suggested.

Gauges of manufacturing activity in the US, Europe and Japan pointed to a slowdown in November while services equivalents also declined. Inflation picked up across these regions, although the rise was broadly in line with market expectations. Despite a slight softening in economic data, we continue to believe a soft landing remains the most likely outcome.

Equities:

The US was the standout performer in November, boosted by the outcome of the election and extending its run of relative outperformance with an impressive 34% gain over the prior 12 months. Technology, financials and consumer discretionary were the best performing sectors in November as Trump’s proposed policies such as extending tax cuts and a lighter regulatory approach were deemed favourable. Materials and healthcare lagged, the latter due largely to the nomination of Robert F Kennedy Jr — a vocal critic of big pharma and vaccine initiatives — to head the Health and Human Services (HHS) department.

Europe’s underperformance seemingly came as a result of Trump’s tariff proposals and political uncertainty, although German stocks have enjoyed a particularly strong start to December with the index hitting new all-time highs. The change in sentiment did not neatly coincide with one specific event, although the nomination of Scott Bessent to US Treasury secretary is seen as positive due to his perceived softer approach to trade tariffs. Additionally, a lower EUR/USD exchange rate and the prospect of further easing from the European Central Bank (ECB) could be helping.

Fixed income:

Bonds performed positively across the board in November, despite the US election outcome. Fixed income markets had been in decline in the weeks leading up to polling day as a Trump victory was seen as a potential concern for bondholders. However, the response has been more positive, potentially helped by decisions such as the Treasury secretary nomination. There could also be an element of positioning at play here, as a sort of sell-the-rumour-buy-the-news dynamic played out.

In the UK, government bonds moved higher with positive returns across the range of maturities. Gilt yields have now fallen below pre-budget levels, suggesting that the market is not too concerned with Labour’s fiscal plans. Despite the BoE lowering its base rate from 5.25% to 4.75% this year, short-dated yields remain elevated and offer potentially attractive low-risk returns. This is due to expectations for further cuts being scaled back considerably in recent months, with rates expected to remain above 4% throughout 2025.

The Fed is expected to deliver another 25 basis point cut at its December meeting, which would take the federal funds rate to 4.50%. This would leave the rate 100 basis points lower than its recent peak of 5.50%. Chair Jerome Powell’s recent comments suggest the bank is still looking to move to a more even keel after keeping rates in restrictive territory for most of the last two years but is in no rush to get there. “The good news is that we can afford to be a little more cautious as we try to find neutral,” said Powell recently.  

French bonds reacted negatively to the latest political developments and the blocked deficit-reducing 2025 budget. This can be seen most clearly in the yield spread against other Eurozone sovereign bonds with French 10-year OATs trading at their widest gap to German 10-year bunds since 2012 and surpassing Greece’s 10-year yield for the first time.

Alts:

The US dollar strengthened in the wake of the US election, boosting returns from US assets in sterling terms. After trading in the mid US$1.30s in September, the GBP/USD rate has declined to around US$1.27 — a similar level to where it began the year. The slowing of economic activity around the globe and China’s false starts in attempts to kick-start its economy have weighed on Brent crude oil, with the benchmark falling to the low US$70s to trade near its lowest levels in three years.

A stronger dollar has added downward pressure to the oil price as well as gold (priced in US dollars), with the precious metal losing almost 4% last month. A drop in market volatility, an orderly outcome to the US election and the possibility of a more gradual pace of Fed cuts going forward have pushed gold lower.