In a tumultuous year, marked by many global challenges, financial markets have had to navigate the storms of geopolitical tensions and economic uncertainties, while being supported by technological advancements, most notably Artificial Intelligence (AI).
All eyes on the US
The world’s largest economy took centre stage as the United States Federal Reserve (Fed) aggressively tightened monetary policy to combat inflation. The Fed’s decisive actions, initiated in March 2022, led to a significant surge in interest rates, which reached their highest level in 16 years. While intended to curb inflation, these measures triggered a banking crisis, with several US regional banks, as well as Credit Suisse, almost collapsing, which sparked fears of a broader global systemic banking issue. US economic growth and inflation numbers have continued to be closely monitored throughout the year and continue to take centre stage, as market participants anticipate the Fed’s next move at its December Federal Open Market Committee (FOMC) meeting.
The rise of AI
Amidst numerous geopolitical and economic developments, AI emerged as a transformative force in 2023. OpenAI’s release of Chat GPT-4 in March underscored the rapid evolution of AI, inviting speculation about its profound implications for the future. The integration of AI into various sectors signalled a paradigm shift in how we perceive and interact with technology. The significance of technological advancements is evident on the S&P 500, as seven tech stocks – Apple, Microsoft, Alphabet (Google’s owner), Amazon, Nvidia, Tesla and Meta — account for a third of the value of the S&P 500, resulting in the index being the most concentrated it has been since the 1970’s.
Geopolitical turbulence on multiple fronts
The conflict in Ukraine persisted for a second year, contributing to increased fragmentation among nations and escalating geopolitical tensions. The war cast a shadow on international relations, with a growing East-West divide prompting concerns about its broader impact on the global economy, while the International Criminal Court’s issuance of an arrest warrant against Russian President Vladimir Putin added another layer of complexity to the issue. Simultaneously, the trade conflict between China and the US added further impetus to the fragmentation of global trade. Israel’s formal declaration of war on Hamas, following a surprise attack, further underscored the fragility of geopolitical dynamics.
Looking ahead: Elections, central banks, and global dynamics
As we approach 2024, global attention turns to impending elections. The election in the United States will be watched particularly closely by market participants, and the Taiwan election in January will likely set the tone for tensions between China and Taiwan.
Market commentators will also closely monitor central banks, as they anticipate a shift towards interest rate cuts in the coming year.
MIXED SENTIMENTS PREVAIL AHEAD OF US JOBS REPORT
US stock market futures exhibited a lack of clear direction on Thursday, with the three major averages hovering around a flat line. Traders remained cautious, refraining from making significant bets as they await the highly anticipated US non-farms payroll report scheduled for release today. Initial jobless claims in the US rose slightly less than expected, and continuing claims fell more than forecasted. However, the US Challenger Job Cuts report indicated increased job cuts by companies in November. Investors also closely scrutinised clues about the global monetary policy outlook, particularly focusing on comments from the Bank of Japan (BoJ), which suggested the possibility of an earlier-than-expected interest rate hike. This development added an additional layer of uncertainty to the market. On the corporate front, technology giant Alphabet saw a 5.3% gain in premarket trading following the release of its most advanced AI model. Shares in global semi-conductor company Advanced Micro Devices (AMD) experienced a near 10% increase after tech companies Meta, OpenAI, and Microsoft announced their intention to utilize AMD’s newest AI chip. Gaming and electronics retailer GameStop recovered from an 8% drop in pre-market trading to close up over 10% for the day as the market attempted to reconcile a top line miss against better than expected bottom line numbers.
In the United Kingdom (UK), the FTSE 100 traded lower, with precious metal miners down by 0.9%, travel and leisure shares dropping over 0.5%, and oil and gas companies experiencing a slight decline. However, auto stocks bucked the trend, rising by over 1%. Notably, media company Future’s stock plummeted by 16%, impacted by lower-than-expected earnings.
Frankfurt’s DAX 40 retreated slightly, retracing from Wednesday’s historic peak. Germany’s industrial production unexpectedly declined in October for the fifth consecutive month, contributing to the cautious sentiment among investors.
COMMODITY MARKETS NAVIGATE TURBULENCE: BRENT CRUDE AND GOLD IN FOCUS
Brent Crude futures staged a technical rebound, surpassing $74.50/barrel on Thursday. However, the rebound comes after five consecutive sessions of decline, leaving prices close to their lowest levels since late June. The latest blow to oil prices came with official data revealing a significant 5.4 million barrel increase in US gasoline inventories, their largest surge in nine weeks, signalling weaker demand. Compounding the challenges, data from the Bureau of Economic Analysis highlighted that US crude exports reached a near record of six million barrels a day in October. Flows to Europe and Asia demonstrated a consistent upward trend. In November, the Organization of the Petroleum Exporting Countries’ (OPEC’s) total production dipped slightly to 27.81 million barrels per day, a 90,000-barrel decrease from October. While Saudi Arabia maintained output close to 9 million barrels, Iran’s output increased, despite OPEC+ members announcing additional cuts of 2.2 million barrels per day last week. Voluntary reductions by Saudi Arabia and Russia accounted for over 1.3 million barrels. Year on year, Brent Crude is trading 1.68% softer, reflecting the challenging conditions faced by the oil market.
Turning to the precious metals sector, gold steadied around $2,030/ounce on Thursday, finding stability after its recent volatility. Investors are closely monitoring US jobs data which revealed a 2.5-year low in US job openings in October, coupled with private payrolls rising less than expected in November, signalling a cooling labour market. Market sentiment suggests a 60% chance of a Fed rate cut in March, with traders increasingly betting on a rate cut by the European Central Bank (ECB) as well. Dovish remarks from ECB member and head of the Bank of France Francois Villeroy heightened expectations, stating that “disinflation is happening more quickly than we thought.” At the time of writing, gold has shown resilience, recording a significant year-on-year increase of 13.9%, emphasising its status as a safe-haven asset amid economic uncertainties and shifting central bank policies. As commodity markets navigate turbulence, investors remain vigilant, adjusting strategies in response to evolving economic indicators and geopolitical developments.
GLOBAL CURRENCY MOVEMENTS REFLECT ECONOMIC UNCERTAINTIES
The global currency landscape witnessed significant fluctuations as investors eagerly await key economic indicators and central bank decisions. The US Dollar Index dipped below 104 on Thursday, reflecting caution among investors ahead of the release of the crucial US non-farms payroll report today. Market expectations anticipate an increase of 170,000 jobs in November, maintaining the jobless rate at a 22-month high of 3.9%, with wage growth slowing to 4%, its lowest level since June 2021.
The Japanese yen experienced a notable surge of over 1.5%, reaching its highest level in three months. This movement followed clear indications from Japanese monetary policy authorities hinting at a potential policy shift. Conversely, the euro extended its decline below $1.08/€, marking its lowest level since mid-November. Dovish remarks from ECB conservative, Isabel Schnabel, reinforced the belief that the Central Bank might expedite interest rate cuts, especially after the euro area’s inflation rate fell to 2.4% in November, below market expectations.
The British pound remained below $1.27/£, with investors processing final Purchasing Managers’ Index (PMI) data and assessing the monetary policy outlook at both the Bank of England (BoE) and the US Fed. Britain’s private sector activity returned to growth in November, contrasting with expectations of a rate cut by the BoE by June, while the Fed is anticipated to act in March.
As global currencies respond to economic indicators, central bank signals, and regional challenges, investors remain watchful, adjusting their strategies to navigate the uncertainties prevailing in the international financial landscape.
The pound started the day trading at 1.2560/$ and 0.8584/€.
Written by Citadel Global Director, Bianca Botes.
Sources: Bloomberg, Refinitiv/Reuters, Trading Economics and Investing.com.
This is our last Weekly Wrap of 2023, and we will resume our commentary on 19 January 2024.
Written by Citadel Global Director, Bianca Botes
© Peregrine Wealth Ltd
This publication has been compiled for information purposes only and does not take into account the needs or circumstances of any person or constitute advice of any kind. It is not an offer to sell or an invitation to invest. The information and opinions in this publication have been recorded by Peregrine Wealth Ltd in good faith from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness or correctness. Peregrine Wealth Ltd accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this publication or its contents. Peregrine Wealth Ltd (registration number 39538) is licensed by the Guernsey Financial Services Commission.