December Market Commentary

Introduction

The US election provided another definitive moment in what has been a politically charged year. With many countries holding elections in 2024, analysts have been second guessing what markets will do for some time. Whether Trump is popular outside the US is debatable, but his election victory was convincing and markets have responded positively so far.

UK

Unlike Trump, Keir Starmer and Rachel Reeves have not come into power supported by a positive economic tailwind. Their first budget in 14 years has created an enormous amount of noise, and the economic headlines in November have not helped them ride it out.

The UK economy grew by just 0.1% in Q3 2024, marking a shift down from the above-trend growth rates seen over the first half of the year (0.5% in Q2, and 0.7% in Q1). The slowing was greater than most analysts had predicted, which was expected to be 0.2%.

The ONS said a fall in manufacturing output and a lack of work in the IT sector pulled back the economy in September, despite a rise in car sales. Business investment increased 4.5% from the same period in 2023, but Britain’s trade position deteriorated further after a third consecutive fall in exports. The damage to trade was offset by a fall in imports as consumers cut back on purchases of foreign goods.

The budget inevitably received a fair share of the blame for this, based on a lack of decision making in anticipation of the budget and now a lack of confidence from businesses faced with higher National Insurance costs and the potential slowing of interest rate cuts.

Some of this may be unfair on the new Chancellor given her short time in the job. However she has placed such emphasis on stimulating growth in the UK economy that she will ultimately be judged on this sole factor whether she is to blame or not.

The base rate was cut a further 0.25% to 4.75% in November but there is an expectation that the budget will slow further cuts. Another cut in December is not expected by the money markets. That said there is little to suggest that the medium term direction of travel towards interest normalisation has changed. 

Europe

The euro zone's economic woes continue. Manufacturing activity fell sharply in November, following some improved signs in October. A further decline in demand has probably scotched any hopes for an quick recovery. The drop in demand has resulted in factories reducing headcount.

Germany and France are performing particularly badly, with Italy not far behind. Hamburg Commercial Bank's euro zone manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, dropped to 45.2 in November, well below the 50 mark which separates growth from contraction.

"These numbers look terrible. It's like the euro zone's manufacturing recession is never going to end. As new orders fell fast and at an accelerated pace, there's no sign of a recovery anytime soon," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

Foreign demand is also falling and a 10% tariff on imports into the US will hurt manufacturing further.

France is also troubled by more political turbulence. PM Michel Barnier's budget proposal could result in a far-right led no-confidence vote designed to unseat his government. French bonds and stocks have suffered.

Inflation nudged up in November. Consumer price inflation in the 20 countries sharing the euro moved to 2.3% in November, according Eurostat, up from 2.0% in October but still broadly in line with expectations. Underlying inflation held steady at 2.7%. As in the UK and US, this is unlikely to change the overall policy of the European Central Bank, but could slow down rate cuts.

United States

The US presidential election was decided on 5th November.

Markets responded positively to the news. As we have said many times, markets don't care about politics but they do care about certainty and predictability. A Trump win seemed to be priced in for some time. Despite his public unpredictability, his second term may be easier to form an advance view on than his first.

The main area of concern for economists is the President Elect's aggressive stance on trade tariffs. President Biden continued with a number of the trade tariffs imposed by Trump in his first term, and even added a few more of his own. However the threats of tariffs of up to 60% are an escalation on what came before. Whether this is Trump posturing ahead of milder tariffs is unclear, but a number of major manufacturers are now accelerating plans to move their factories out of China to avoid the most obvious outcomes of a trade war.

The Fed will met on 7th November and made a further 0.25% cut to interest rates. As in other parts of the world they added a note of caution around further cuts but are not expected to change policy. They remain more concerned about the job market than inflation.

Far East

In response to economic headwinds this year, the Chinese government introduced a substantial stimulus package, including the issuance of 2 trillion yuan in special sovereign bonds and a 50 basis point cut in the reserve requirement ratio. These measures aim to bolster domestic demand and support sectors such as real estate. There were early signs in their economic data that this was starting to improve the economy. Manufacturing showed increases in new orders and production, including a rise in new export orders. Employment rates continued to decline, but at a slower rate. Chinese equity markets were volatile, and the Trump election added to the uncertainty. BBVA Research believe the tariffs could reduce China's growth by 1%.

Japan's core inflation continues to grow, fueling expectations that the Bank of Japan will hike interest rates by a further 0.25% in December. At the same time factory output fell and corporate recurring profits were down. Clarity on US trade tariffs appears to be stalling some investment.

Emerging Markets

Emerging markets experienced varied performance influenced by global economic conditions, currency fluctuations, and geopolitical developments.

The US dollar appreciated, driven by President-elect Donald Trump's support for its global reserve status and warnings against alternative currencies. This strength exerted pressure on emerging market currencies, leading to depreciation in several cases. Meanwhile the Brazilian real reached a record low, trading above six per US dollar, amid investor concerns over the government's fiscal policies.

Trump's commitment to reducing energy costs by increasing oil production presented mixed outcomes. While beneficial for oil-importing emerging markets through lower energy expenses, it posed challenges for oil-exporting nations reliant on higher prices for economic stability.

In India, despite challenges faced by conglomerates like the Adani Group, foreign investor confidence remained robust, supported by strong economic growth and a burgeoning consumer market.

JPMorgan upgraded Mexican equities to "overweight," citing strong US growth and favourable remittance dynamics, which bolster consumer spending.

Conclusion

One more key date in the political calendar has passed now that US presidential election has concluded. Whilst Trump is famously unpredictable, the markets seem to be more comfortable with his second term than they were with his first.

Equity portfolios always benefit from positive performance in the US given their global significance.
We are still confident that interest rate normalisation will carry on into 2025, despite the hesitancy brought in by Labour's first budget and the threat of great US trade tariffs. This may slow normalisation down but we believe the direction of travel remains the same.

And Finally...

Did you know that a day on Venus is longer than a year?

On Venus, a single day lasts longer than a year, as the planet takes 243 Earth days to rotate on its axis but only 225 Earth days to orbit the Sun.

Sources

Market data

https://www.reuters.com/markets/europe/euro-zone-nov-factory-activity-fell-sharply-outlook-gloomy-pmi-shows-2024-12-02/

https://www.reuters.com/markets/europe/euro-zone-inflation-edges-up-underlying-price-growth-steady-2024-11-29/
https://www.marketwatch.com/story/frances-bond-yields-match-greeces-for-first-time-amid-political-instability-in-paris-deb88602
https://www.reuters.com/markets/asia/chinas-nov-factory-activity-growth-hits-5-month-high-caixin-pmi-shows-2024-12-02/
https://www.reuters.com/markets/asia/china-nov-manufacturing-activity-expands-second-straight-month-2024-11-30/
https://www.marketwatch.com/story/china-to-raise-local-government-debt-ceiling-by-840-billion-c654eec1
https://www.reuters.com/world/japan/japans-factory-activity-falls-fastest-pace-8-months-pmi-shows-2024-12-02/
https://www.reuters.com/world/japan/japans-stronger-q3-corporate-capex-points-solid-domestic-demand-2024-12-02/
https://www.reuters.com/markets/asia/core-inflation-japans-capital-accelerates-november-2024-11-28/
https://www.reuters.com/markets/us/global-markets-view-usa-pix-2024-12-02/
https://www.ft.com/content/1e6c82f6-86cc-4963-90bb-3f90b1f81097
https://www.reuters.com/business/energy/trumps-low-oil-price-promise-is-risk-boon-emerging-markets-2024-12-02/
https://www.reuters.com/markets/adani-wipeout-hurts-wont-derail-foreign-investor-faith-india-2024-11-28/
https://www.reuters.com/markets/jpmorgan-upgrades-mexican-equities-us-growth-downgrades-brazil-2024-11-27/
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Business and commentary:

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Market commentary | Vanguard UK Professional
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