As we step into 2024, the global financial landscape remains fraught with challenges, creating a complex tapestry for investors and markets alike. In the coming year, over two billion voters across 50 countries will shape the political landscape with national elections, including the ever-influential United States (US) election, which is taking centre stage.
Interest rate uncertainty remains a key theme, with central banks closely monitoring inflation trajectories. Markets have been quick to price in potential rate cuts, with expectations pointing to a move as early as March. However, the US Federal Reserve’s (Fed’s) rhetoric has proven less dovish than anticipated, injecting an additional element of unpredictability into the equation.
Global economic growth is anticipated to persist below capacity for major economies, reflecting the ongoing challenges faced on multiple fronts. Geopolitical tensions have escalated, with conflicts in Ukraine and the Middle East, while the strained relationship between China and Taiwan adds an additional layer of complexity. Supply chain disruptions loom large as geopolitical fragmentation continues to reshape the global environment, necessitating strategic diversification.
Currency markets are poised for continuous volatility, reacting to shifts in interest rate differentials, economic growth outlooks, and geopolitical events. Investors must remain vigilant, as these factors become the compass directing currency fluctuations in the year ahead.
In this intricate financial milieu, strategic decision-making becomes paramount. Informed decisions and a keen awareness of unfolding events will be the lights guiding us through the complexities of the year ahead.
A CLOSER LOOK AT DAVOS
The annual meeting of the World Economic Forum (WEF) has commenced in Davos, gathering a global cohort of delegates from big business, governments, civil society, academia, and media. This influential assembly is more than a mere conference; it is a platform where the world’s foremost decision-makers convene to address critical global challenges and strive for the betterment of the world.
Davos holds a dual significance for politicians and corporate leaders. Beyond being an arena for discussion, it serves as a unique opportunity to engage, influence, and establish a formidable global presence.
The discussions at Davos 2024 have revolved around four main themes:
- Achieving security and cooperation in a fractured world
- Exploring strategies for fostering economic growth and job creation in a rapidly evolving global landscape
- Artificial Intelligence as a driving force for the economy and society
- A long-term strategy for climate, nature, and energy
The WEF’s overarching goal is to “rebuild trust in an era of rapid change and increased fragmentation.” With the war in Ukraine, the conflict in Gaza, and other geopolitical tensions taking center stage, the discussions at Davos are poised to address the profound disruption that characterises the contemporary global landscape.
As the world grapples with unprecedented challenges, Davos 2024 stands as a crucial forum for fostering collaboration, understanding, and innovative solutions.
RECENT MARKET MOVEMENTS
Equity markets navigate volatility
US stock futures rebounded on Thursday, with the S&P 500 rising by 0.8%, the Nasdaq 100 up 1.35%, and the Dow Jones +0.54%. Corporate news and earnings took center stage, driving premarket activity. Taiwan Semiconductor Manufacturing’s positive outlook lifted chipmakers, pushing Advanced Micro Devices and Nvidia to gains. Tech giant Apple rose 3.26% following the Bank of America’s upgrade of the stock to “buy”, and aircraft manufacturer Boeing gained 4.2% after securing a substantial order from India’s Akasa Air. US bank holding company Truist Financial exceeded expectations in its latest report.
In the United Kingdom (UK), the FTSE 100 remained near a seven-week low amid concerns over a potential delay in interest rate cuts by the Bank of England (BoE). Luxury watch retailer Watches of Switzerland faced a significant drop of over 36%, after adjusting its annual revenue forecast due to economic challenges. Conversely, online betting company Flutter surged almost 10% after a 15% rise in fourth-quarter revenue.
Frankfurt’s DAX 40 rebounded, trading 0.7% higher at 16,540 points, following three consecutive sessions of losses. Manufacturing heavyweights MTU Aero Engines AG, Siemens Energy, and Infineon recorded gains above 2%. The European Central Bank’s (ECB’s) December meeting minutes revealed confidence in inflation returning to target, but also a need to maintain a restrictive stance. Recent hawkish remarks led to adjusted rate-cut predictions, projecting the first reduction in April instead of March.
In Asia, the Nikkei 225 edged down 0.03%, closing at 35,466, influenced by a weak Wall Street and Wednesday’s stronger-than-expected US retail sales data. The TOPIX Index lost 0.17% as Japanese shares faced a third straight session of decline. Japan’s capital spending data for November highlighted challenges including soft domestic consumption and weak external demand.
Oil markets react to geopolitical tension
Brent Crude futures surged to over $78/barrel on Thursday, fueled by escalating tension in the Middle East, US strikes on Houthi targets in Yemen – after Houthi rebels launched missiles on a US bulk carrier on Monday – and the Pakistani military strikes on Iran’s separatist targets as hostilities between those two nations escalate. In addition, despite unexpected data from the American Petroleum Institute indicating a 0.483 million barrel increase in US crude inventories last week, central storage hub Cushing, Oklahoma, saw a decline. Adding to supply constraints, severe cold weather conditions in the US led to a significant drop in US oil output by 650,000 to 700,000 barrels per day in North Dakota, a key US oil-producing state. On the demand side, the Organization of Petroleum Exporting Countries projected a robust increase of 1.85 million barrels per day in global oil demand to 106.21 million barrels per day by 2025, according to its monthly report. The International Energy Agency also revised its 2024 oil demand growth forecast higher by 180,000 barrels per day to 1.24 million barrels per day.
Gold prices rose to around $2,010/ounce on Thursday, experiencing a slight uptick amid a modest pullback in the dollar and rising Treasury yields. However, the precious metal remained close to its lowest levels in five weeks. Stronger-than-expected US retail-sales data tempered expectations for interest rate cuts any time soon.
Investors continue to closely monitor geopolitical developments in the Middle East following the reports of new US strikes on Houthi targets in Yemen.
Geopolitical tensions and interest rate uncertainty drive currency prices
The US Dollar Index inched higher on Thursday, nearing 103.6, as recent economic data tempered expectations of any imminent interest rate cuts by the Fed. Unexpectedly low initial jobless claims, as well as robust building permits and housing starts, underscored the strength of the labour market. Fed officials, including Fed Governor Christopher Waller, pushed back against aggressive bets on policy easing, leading markets to adjust their expectations for a Fed rate cut in March to 53.8%, which was down from 63.1% in the previous session, according to CME Group’s FedWatch Tool. The dollar saw its most significant gains against the Swiss franc and the euro.
The euro struggled below $1.09/€, hovering near mid-December lows, influenced by overall dollar strength as investors recalibrate their expectations of when interest rate cuts will occur. At Davos, ECB President Christine Lagarde hinted at a potential rate cut in the summer, emphasising the need for caution amid lingering uncertainties. Traders now expect the ECB to deliver five quarter-point cuts, down from the previous estimate of six reductions.
The British pound strengthened slightly to $1.26/£ after UK data revealed elevated price pressures, reducing expectations of an interest rate cut in May. The unexpected acceleration of inflation in December to 4%, driven by increased tobacco duty, altered the landscape. Traders now project four 25 basis point cuts with a 50% likelihood of a fifth, compared to the previous consensus of six reductions.
Brent Crude: $79.05
Sources: Reuters/Refinitiv, Bloomberg, WEF Annual Meeting and Trading Economics.
Written by Citadel Global Director, Bianca Botes
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