Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 15/01/24
Risk assets have entered 2024 on a cautious tone following strong gains in 2023
Key Takeaways
Global equity markets posted sharp gains in 2023, with the MSCI ACWI ending the year up by +20%. The Government bond market displayed high volatility, as the US Treasury 10-Year yield started and finished 2023 near 3.8%, but during the year rose to a 17-year high of 5%.
Euro area assets followed suit, with the Eurostoxx index up by +16%. The German Bund 10-year yield decreased by circa -50 bps in 2023 to 2.03% and a peak of 2.97% in late-September 2023. As a result, a typical 60/40 multi-asset EUR portfolio recorded double digit gains in 2023 of +15%, broadly reversing 2022 losses of -14%.
Asset performance was closely linked to monetary policy. During 2023, an easing of inflation pressures fed through to investors’ expectations that the interest rate hiking cycle has come to an end. Recall that the Federal Reserve increased the Federal Funds Rate (FFR) by +525 bps from March 2022 to July 2023 to a range of 5.25% - 5.5% and the ECB increased rates by +450 bps from July 2022 to September 2023 (Deposit Facility Rate: +4.0%).
Investors anticipate rate cuts to commence soon, as early as in March for the Fed according to futures markets, with market participants expecting the FFR at 3.75% 4.0% by end-2024. In a similar note, according to overnight index swaps, rate cuts by the ECB are expected to start in April, cumulating to -150 bps by end-2024.
Central bank balance sheet policies have also come into focus. The minutes of the December 2023 FOMC meeting surprised investors, revealing that a discussion has commenced on when Quantitative Tightening (QT) should slow, before eventually ceasing. Note that the Fed’s QT currently “runs” at a monthly pace of c. -$95 billion. The holdings of US Treasury securities (-$60 bn per month) and agency mortgage-backed securities (-$35 bn per month) have been reduced by -$1.0 trillion & -$0.3 trillion, respectively, since May 2022, with total balance sheet assets of $7.7 trillion or 28% of US GDP, from 19% of US GDP in 2019 (pre-covid).
The ECB plans to accelerate QT as of Η2:2024, albeit the APP portfolio is set to shrink to a sizeable €2.7 trillion (19% of euro area GDP) by year-end. Up to June 2024, maturing assets of the PEPP portfolio (€1.7 trillion or 12% of euro area GDP) will continue to be reinvested 100%. In H2:2024 though, a reduction of holdings of €7.5 bn per month will occur via only partial reinvestments, before reinvestments cease in full as of January 2025.
Expectations for a “soft landing” of global economic activity are a key aspect of the benign (“goldilocks”) scenario being priced-in by investors for 2024. Continuing solid performance in the US remains pivotal for the respective optimism, with the FRB of Atlanta’s GDPNow model pointing to GDP growth of +2.2% qoq saar in Q4:2023, which would result in a strong +2.5% in FY:2023. In all, according to the World Bank, real global GDP growth is envisaged at +2.4% in 2024, from an estimated +2.6% in 2023 and +3.0% in 2022 (+3.1% on average in 2010 – 2019).
Corporate profitability will also be a focal point for investors, as optimistic expectations for 2024 EPS growth (+10%) are based both on margin expansion and top-line growth of +5%. Note that the Q4:2023 reporting season commenced in the US in the past week, with major banks' EPS, broadly undershooting expectations. In addition, geopolitical tensions (Ukraine, Middle East) are intact. Commercial cargo flows through the prominent for global trade Red Sea have been heavily disrupted by attacks from Houthis since November 2023, raising transportation costs either via higher insurance fees or due to a redirection of trade flows towards longer routes.
Finally, a probably noisy path towards the November 2024 US Presidential elections, where all 435 seats of the House of Representatives and 34 of the 100 seats of the Senate will also be contested, could also induce policy, and subsequently, market volatility.
Key Takeaways
Global equity markets posted sharp gains in 2023, with the MSCI ACWI ending the year up by +20%. The Government bond market displayed high volatility, as the US Treasury 10-Year yield started and finished 2023 near 3.8%, but during the year rose to a 17-year high of 5%.
Euro area assets followed suit, with the Eurostoxx index up by +16%. The German Bund 10-year yield decreased by circa -50 bps in 2023 to 2.03% and a peak of 2.97% in late-September 2023. As a result, a typical 60/40 multi-asset EUR portfolio recorded double digit gains in 2023 of +15%, broadly reversing 2022 losses of -14%.
Asset performance was closely linked to monetary policy. During 2023, an easing of inflation pressures fed through to investors’ expectations that the interest rate hiking cycle has come to an end. Recall that the Federal Reserve increased the Federal Funds Rate (FFR) by +525 bps from March 2022 to July 2023 to a range of 5.25% - 5.5% and the ECB increased rates by +450 bps from July 2022 to September 2023 (Deposit Facility Rate: +4.0%).
Investors anticipate rate cuts to commence soon, as early as in March for the Fed according to futures markets, with market participants expecting the FFR at 3.75% 4.0% by end-2024. In a similar note, according to overnight index swaps, rate cuts by the ECB are expected to start in April, cumulating to -150 bps by end-2024.
Central bank balance sheet policies have also come into focus. The minutes of the December 2023 FOMC meeting surprised investors, revealing that a discussion has commenced on when Quantitative Tightening (QT) should slow, before eventually ceasing. Note that the Fed’s QT currently “runs” at a monthly pace of c. -$95 billion. The holdings of US Treasury securities (-$60 bn per month) and agency mortgage-backed securities (-$35 bn per month) have been reduced by -$1.0 trillion & -$0.3 trillion, respectively, since May 2022, with total balance sheet assets of $7.7 trillion or 28% of US GDP, from 19% of US GDP in 2019 (pre-covid).
The ECB plans to accelerate QT as of Η2:2024, albeit the APP portfolio is set to shrink to a sizeable €2.7 trillion (19% of euro area GDP) by year-end. Up to June 2024, maturing assets of the PEPP portfolio (€1.7 trillion or 12% of euro area GDP) will continue to be reinvested 100%. In H2:2024 though, a reduction of holdings of €7.5 bn per month will occur via only partial reinvestments, before reinvestments cease in full as of January 2025.
Expectations for a “soft landing” of global economic activity are a key aspect of the benign (“goldilocks”) scenario being priced-in by investors for 2024. Continuing solid performance in the US remains pivotal for the respective optimism, with the FRB of Atlanta’s GDPNow model pointing to GDP growth of +2.2% qoq saar in Q4:2023, which would result in a strong +2.5% in FY:2023. In all, according to the World Bank, real global GDP growth is envisaged at +2.4% in 2024, from an estimated +2.6% in 2023 and +3.0% in 2022 (+3.1% on average in 2010 – 2019).
Corporate profitability will also be a focal point for investors, as optimistic expectations for 2024 EPS growth (+10%) are based both on margin expansion and top-line growth of +5%. Note that the Q4:2023 reporting season commenced in the US in the past week, with major banks' EPS, broadly undershooting expectations. In addition, geopolitical tensions (Ukraine, Middle East) are intact. Commercial cargo flows through the prominent for global trade Red Sea have been heavily disrupted by attacks from Houthis since November 2023, raising transportation costs either via higher insurance fees or due to a redirection of trade flows towards longer routes.
Finally, a probably noisy path towards the November 2024 US Presidential elections, where all 435 seats of the House of Representatives and 34 of the 100 seats of the Senate will also be contested, could also induce policy, and subsequently, market volatility.