Investing

Global Markets Recap - Week of Dec 4, 2023

1. What Moved the Markets?

Europe

🏈 Bottom Line: European stocks and major indexes advanced due to expectations of central bank rate cuts amid slowing inflation and economic challenges, while government bond yields fell and the ECB signaled a dovish shift.

European Stocks Advance: The STOXX Europe 600 Index rose for the fourth consecutive week, ending 1.30% higher, driven by expectations of potential central bank interest rate cuts next year.
Major European Indexes Gain: France’s CAC 40 (+2.46%), Germany’s DAX (+2.21%), Italy’s FTSE MIB (+1.59%), and the UK’s FTSE 100 (+0.33%).
European Government Bond Yields Decrease: Yields broadly fell, with the 10-year German bond yield approaching yearly lows and Italian bond yields also declining. In the UK, the 10-year government bond yield dropped below 4% for the first time since mid-May.
ECB Policymakers Signal Possible Rate Cuts: ECB Executive Board member Isabel Schnabel indicated a dovish shift, suggesting a further rate increase is unlikely. Governing Council member Francois Villeroy de Galhau noted that disinflation is happening faster than expected, raising the possibility of rate cuts in 2024.
German Economic Challenges: Industrial output fell 0.4% in October, marking the fifth consecutive month of decline. Factory orders dropped 3.7%, and the unemployment rate rose to 5.9% in November.
UK Housing Market Weakens: The construction sector in the UK continued to decline, with a significant drop in homebuilding activities in November, as reported by the Purchasing Managers’ Index.

US

🏈 Bottom Line: U.S. stocks showed mixed performance, with small-caps leading the way and technology stocks benefiting from AI enthusiasm, while consumer optimism grew despite a cooling labor market, and bond markets saw varied activity with yields ending relatively unchanged.

U.S. Stocks Mixed, Small-Caps Rally: Major indexes ended flat to modestly higher, with the Russell 2000 outperforming the S&P 500 for the third time in four weeks, reducing its year-to-date underperformance. Dow flat at 36,248. S&P 500 +0.2% to 4,604. Nasdaq +0.7% to 14,404. Russell 2000 +1% to 1,881. CBOE Volatility Index -2.2% to 12.35.
Growth Stocks vs. Value Shares: Growth stocks increased their lead over value shares. Within the S&P 500, energy stocks lagged as oil prices fell below USD 70 per barrel for the first time since June.
AI Enthusiasm Boosts Tech Stocks: Alphabet's shares rose over 5% after unveiling AI model Gemini. Advanced Micro Devices' shares surged nearly 10% with the launch of new AI chips. Apple's market cap reached USD 3 trillion again.
Employment Data Surprises Positively: Nonfarm payrolls added 199,000 jobs in November, exceeding expectations of 180,000. Unemployment fell to 3.7%, and average hourly earnings rose 0.4%.
Consumer Sentiment Rises: The University of Michigan's consumer sentiment index in December hit its highest level since August. Inflation expectations dropped to 3.1%, the lowest since March 2021.
Mixed Economic Data: Services sector activity picked up in November, but October job openings dropped to 8.73 million, the lowest since March 2021. October factory orders also fell more than expected.
Bond Market Dynamics: Long-term interest rates fluctuated, with the 10-year U.S. Treasury yield hitting 4.10% on Thursday. Tax-exempt municipal bonds remained supported by technical conditions.
Corporate Bond Market Weakens: The investment-grade corporate bond market softened early in the week. High yield bond demand was strong, especially for BB rated bonds. The bank loan market saw active refinancing and repricing.

Japan

🏈 Bottom Line: Japan's stock markets declined amid speculation of an early shift in the Bank of Japan's monetary policy, leading to a contraction in the economy and a rise in government bond yields, while the yen strengthened against the U.S. dollar.

Japanese Stocks Decline: The Nikkei 225 Index (-3.4%) and the broader TOPIX Index (-2.4%).
Bank of Japan (BoJ) Comments Spur Speculation: Officials' comments led to speculation about an early end to negative interest rates, negatively impacting riskier assets.
Economic Contraction in Japan: Japan's economy shrank more than initially estimated in Q3, contracting by 2.9% on an annualized basis.
Japanese Government Bond Yields Rise: The yield on the 10-year JGB increased to 0.77%, influenced by a weaker-than-expected 30-year JGB auction.
Yen Strengthens Amid Policy Normalization Speculation: The yen reached its highest in nearly four months against the U.S. dollar, fueled by expectations of BoJ policy shifts and reduced interest rate differentials with the U.S.
Potential Early Shift in BoJ Monetary Policy: Investors interpreted comments by BoJ officials as indicating a possible earlier-than-expected change in monetary policy.
BoJ Deputy Governor Suggests Benefits from Policy Shift: Deputy Governor Ryozo Himino noted that exiting ultra-loose policy could be beneficial, but cautioned careful handling.
BoJ Governor Anticipates Tougher Policy Handling: Governor Kazuo Ueda highlighted the increasing challenges in monetary policy for the upcoming year, emphasizing the need to monitor the wage and price cycle.

China

🏈 Bottom Line: Chinese equities declined following Moody's downgrade of China's sovereign debt outlook to "negative," amid concerns over debt-laden local governments and a faltering economy, despite mixed signals in service sector activity and a slight improvement in trade data.

Chinese Equities Drop: The Shanghai Composite Index (-2.05%), and the CSI 300 (-2.4%), reaching its lowest in nearly five years. Hong Kong's Hang Seng Index (-2.95%).
Moody’s Downgrades China’s Debt Outlook: The rating was changed from "stable" to "negative," highlighting risks from debt-laden local governments and state firms.
Economic Challenges in China: The downgrade reflects ongoing issues, including a property market downturn and weak consumer and business confidence, despite Beijing's pro-growth measures.
Mixed Signals in Service Sector Activity: The Caixin/S&P Global services activity index rose to 51.5 in November, indicating expansion, but investors remained bearish due to broader economic concerns.
Contrasting PMI Data: The positive Caixin/S&P Global survey result contrasted with the official nonmanufacturing PMI, which showed contraction for the first time in a year.
Trade Data Shows Mixed Results: November exports increased by 0.5%, recovering from a decline, while imports unexpectedly fell by 0.6%. The overall trade surplus rose to USD 68.39 billion.