In January, financial markets carried over the positive trend from the previous year. On the surface, US growth is still solid. The positive expectation is also supported by the upcoming interest rate cuts. Although the Fed is signaling the first interest rate cuts, Jerome Powell is not in a hurry, leaving the key interest rate unchanged in the target range of 5.25%-5.5%. Growth for the fourth quarter of 2023 in the US was rated at 3.3% in the recently published preliminary estimate, significantly higher than the growth rate of 2% expected by economists. Consumer confidence and the retail sector also surprised on the upside. US inflation cooled further despite higher consumer spending (Core PCE Price Index, three-year low 2.9% YoY). The US economy is also likely to grow much more steadily than other regions in the new year. For 2024 as a whole, the consensus expects growth of 1.5%. The European Union is expected to grow by 0.9%. Germany, the largest European economy, is still sluggish (Q4 growth -0.3% and expected growth of 0.3% in 2024). Things look more dynamic in the periphery, as Spain, for example, is likely to grow by around 1.4% this year. In January, the ECB left key interest rates unchanged for the third time in a row. Despite the weak economic outlook, the ECB is still concerned about inflation, which is falling too slowly. The purchasing managers' indices for the eurozone signaled a decline in growth in January, for the 8th month in a row. President Christine Lagarde's cautious statement that the European Central Bank (ECB) could cut interest rates from around mid-2024 was interpreted by the markets as a sign that earlier steps are definitely being considered. The market is now firmly expecting the first cut in April (90% probability). Japan's falling overall inflation has given the Bank of Japan (BOJ) confirmation that it will not change interest rates for the time being. Inflation fell from 2.8% in November to 2.6% in December (YoY). However, at 2.3%, services inflation is still at its highest level for almost three decades. Consumer confidence in China is still at rock bottom. Increasing skepticism and low investor sentiment have led to a crisis of confidence. With sentiment at its lowest level in decades, there is growing debate as to whether the Chinese economy will ever overtake that of the US or whether it will instead fall into the kind of stagnation that Japan experienced in the 1990s. The Chinese economy has fallen into recession, while the S&P 500 has risen to new record highs and the Nikkei 225 in Japan has reached its highest level in 34 years. This has led to an enormous valuation divergence. Concerns are growing among party leaders and Premier Li Qiang has promised "powerful" measures to stabilize the markets. The possible bailout measures and the announced reduction in bank reserves could help to cushion the current crisis, but investors are calling for more concrete measures from Beijing to promote growth and drive a sustainable recovery in the market.
After initial losses, almost all major stock markets recovered and gained between 2% and 3%. The major exceptions were the Chinese stock market (CSI 300, -6.3%) and the Hong Kong market (Hang Seng, -9.2%). In recent weeks, the Chinese stock markets have seen the highest inflow of money since 2015. This development is due to various factors, but above all to support measures by the Chinese authorities and the sovereign wealth fund to support the market, as well as a potential USD 278 billion rescue package and a surprisingly large reduction in reserve requirements for banks. The Chinese stock market is trading at a very low valuation (MSCI China, P/E ratio expected 9.5) following the immense loss of confidence in recent months. The earnings season for the 4th quarter is already underway. Overall, the US market is expected to grow by 4.5% year-on-year. The highest growth is expected in the technology and communications sectors (3.5% each), while the healthcare and energy sectors bring up the rear. However, expectations were downgraded considerably in advance (-6.4%). The winners of the AI revolution are leading the growth figures. NVIDIA's profit is expected to quadruple in Q4 compared to the previous year. Microsoft has already reported its figures and exceeded analysts' expectations. Market volatility remained historically low (see FOCUS).
Yields have risen slightly since the beginning of the year. Market expectations regarding future interest rate hikes were extreme in December. Market participants expected a 100% probability of a first cut in March for the USA. As of today, this probability has fallen to 37%. Market participants expect two interest rate cuts in the USA and Europe by June. Long-term interest rates rose slightly at the start of the year. An inverse structure still prevails on the major bond markets (i.e. short-term interest rates are higher than long-term rates).
Tensions in the Red Sea caused disruption to international shipping and significantly increased freight rate prices. Precious metal prices benefited little from the geopolitical tensions and the USD recovered from its weak December. The price of crude oil climbed by 7%.
January brought hardly any new insights. Overall, markets are relying heavily on the next monetary easing. The investment community is currently overlooking the risks of a recession. The data confirms this view in the snapshot. The high national spending deficits are emblematic of the continued resilience of many Western economies and stable labor markets. If, contrary to widespread expectations, a recession does occur, government bonds and gold will benefit from a slowdown in growth. Low volatilities, as shown in our FOKUS, also make it possible to hedge a portfolio against major corrections with little effort. Our asset allocation takes such opportunities into account.