The MSCI’s world share index, a broad measure of global developed market equities, posted a 21.56% gain in 2023, its most in four years. The move was established in the run since October as investors bet central banks will begin cutting interest rates in 2024. The buying triggered short covering which exasperated the move higher. The big question as always with stocks, can they continue higher? There are many factors, the main one at this time is interest rates given the bet is they will come down and a soft landing in store for the world. There are many headwinds, no less the geopolitical hotspots in Russia, China and the Middle East.
The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries*. With 1,509 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Treasury yields finished the year very close to their final levels from 2022 with the 10-yr yield surrendering a tiny 0.2 bps for the year to 3.87 per cent, but that masked all the rate-related speculation that went on leading up to this point. Over the year the 10-yr yield tested 5.000% in late October, from that ‘panic peak’ a strong rally over the next ten weeks drove the benchmark yield to unchanged for the year as the market began pricing in the likelihood of multiple rate cuts in 2024.
The 2s10s spread ended the year at -37 bps, up 17 bps from -54 bps at the end of 2022. The price of crude oil held steady today, falling $8.67, or 10.8%, for the year The U.S. Dollar Index also ended the session flat, at 101.23, surrendering 2.2% in 2023. The move in the dollar came after two years of strong gains, with declines mirroring the fall in yields. Gold prices also had their best year since 2020.
Leadership came from Wall Street with benchmark S&P 500, which finished up about 24 per cent this year just short of an all-time high at the close. The move was fueled by megacap tech stocks, the so called magnificent seven stocks. There is third part of the equation, can these seven stocks continue higher, and f not can there be new leadership to the party?
European shares ended the year up almost 13 per cent on hopes of softer monetary policy from major central banks next year, a cooling of the energy threat from Russia and stability from a chaotic two years. The Stoxx Europe 600 closed the final trading session of 2023 up 0.2 per cent, taking yearly gains to about 13 per cent.
The Australian share market rose 7.8 per cent, its best return since 2021. ASX 200 slipped 0.3 per cent on the last day, or 23.5 points, to 7590.8. The index is within 50 points of the record set in August 2021. The rise of iron ore prices to eighteen-month highs having much to do with that. The move sees big profits for Australia’s miners but also perhaps a budget surplus given the Australian government had budgeted a $60 iron ore price and it closed 2023 around $140. It is early days and iron ore prices are notoriously volatile.
Markets are now expecting the US Federal Reserve to start rate cuts in March, according to the CME FedWatch tool, a shift from assumptions just last month.
Here are some reasons for caution on rates:
- Fed showing rate cuts in 2004 IS NOT a fresh development. They’ve been showing cuts in 2024 off 2023 levels in every single dot plot since June 2022.
- Some say that it was a pivot because they removed an extra hike for this year from the September 2023 dot plot. While that’s true, it shouldn’t have surprised anyone. Everyone thought the dots would flatten out this year. Markets had removed another hike long ago. FOMC officials were increasingly guiding they thought they might be done before the recent meeting.
- The fact they added an extra 25bps to cuts in the median projection for next year was taken as evidence of a pivot.
- Some are saying there’s a broader consensus on the FOMC in favor of easing. BUT Next year’s 75bps of easing by the median participant masks the fact that there are only six out of 19 dots in that camp with four calling for -100bps and one calling for -175bps, but in the other direction there are five saying they favor -50bps, 1 favoring only -25bps and two saying they shouldn’t be easing at all. You call that a consensus?
- Chair Powell did intimate that the minutes would contain a further discussion on when to cut when he was asked during his recent press conference about when it will begin to become appropriate to begin easing and responded with “That was a discussion point in our meeting today.” Since the minutes recap the discussion, they are very likely to expand upon the dialogue.
- One key may be reference to the breadth of support against prematurely easing monetary policy using the Fed’ language that connotes frequency of citation (none, one, a couple, a few, some, several, many, most, generally all etc
Chinese underperformed Despite Constant Efforts to Pump It
All year we heard from experts that China’s economy would rebound from analysts and experts chasing subscribers and fees. That must be the only reason given we all were well aware of the property market collapse, the Zero Covid policy disaster, the tie in with Russia and many more Chinese headwinds. It seemed every week the Chinese Communist Party was trying a new way to stimulate the economy, all to no avail.
Chinese markets underperformed in 2023, Hong Kong stocks in particular were crushed. Hong Kong’s Hang Seng Index and China’s onshore blue-chip index lost over 10 per cent in the year. Those losses compare to Japan’s Nikkei 225 Index, which gained 28 per cent on the year.
Inflation or deflation?
Inflation while down was not proportional as the year end commodities gains and losses highlights. However, food staples wheat and corn futures saw their biggest annual drop in a decade. Speculator forced selling, easing supply bottlenecks in the Black Sea region and higher production pressured prices. We saw orange juice and others saw higher to record or near record highs.
Despite all the fear and gloom and geopolitical tinderboxes burning in the Middle East and Russia Crude oil closed 2023 down over 10% lower for its first annual decline in three years. It was a year highlighted by repeated efforts by OPEC+ to ram prices higher via production cuts. The US and specifically Texas ramped up production to record highs to gain valuable customers, export income and energy security for the U.S.
Front-month Nymex crude for February delivery closed out the year -10.7% to $71.65/bbl, and front-month Brent Crude for March delivery settled -10.3% to $77.04/bbl. Gasoline futures fell 14.5% in 2023 to $2.1026/gal, heating oil fell 24.1% Y/Y to $2.5531/gal and natural gas (NG1) plunged 43.8% to $2.514/MMBtu.
Source: TC, Reuters
From The Traders Community News Desk