Money Markets - December 2024
Rate divergence and December markets.
“Discretion is the better part of valour.”
- Shakespeare, Henry IV
Welcome to AlphaPicks’ monthly market update - a rundown of global markets for the coming weeks in under ten minutes (sort of).
Here’s what you need to know…
Macro
China stimulus reports continue to make headlines across financial markets, but the follow-through into their economy and equities is fading. Last month, China stocks faced headwinds of trade tensions as Trump announced 10% tariffs. Equities were affected, although there had previously been a belief that tariffs in the region of 60% might be possible. Markets didn’t like the announcement, even if it came in on the lenient side.
However, renewed China stimulus talks boosted sentiment into the end of November as the focus turned to December’s Central Economic Work Conference. Investors expect the introduction of measures to boost consumer spending, which may be needed to bolster the Chinese economy.
Increasing headwinds with decreasing stimulus sentiment is how we’d describe China right now. The easy money has come and gone. Time for more navigation.
Between the U.S. and Europe, there is an emerging divergence in the December rate cut story. More detail on that is in the FX section. However, jobs data is due on the 6th, which we’ll touch on now.
October’s report released in early November was noisy. The Boeing strike and hurricane disasters impacted the jobs report. The unemployment rate came in steady at 4.1%, but NFP figures showed just 12,000 new jobs. This will be one we’re watching closely. A rebound might confirm the noise was just indeed noise last month. But another weak report may throw the labour market back into the Fed’s spotlight, something that has recently taken a back seat as inflation talk reignited.
Equities
U.S. indices see out November at highs as the post-election rally is still leading strong. The Russell (small caps) returned >10% in November. If history is anything to go by, December usually is a strong month.
The SKEW Index is nearing the 2021 highs. This means SPX OTM options are seeing the slope of IV rise. The probability of a two or three-std dev move over the next 30 days is heightened. It's not a great predictor, but information that is important to be aware of.
Europe stocks and the FTSE are quiet as they hear the cheers from across the pond. However, they are faring well considering a challenging economic environment in powerhouses such as Germany and France. The discrepancy is stark, but there’s a reason for the disconnect. Unlike in the U.S., many foreign stock indexes don’t depend much on their local economies for growth.
We can also attribute a dampened performance to the lack of tech weight in the indices, a sector that has been on a tear over the last few years as AI innovation runs riot.
Do we expect a change? No. The U.S. will keep drawing the investment flow in comparison to other DM peers.
In EM markets, India stocks are back on the rise after Prime Minister Modi secured a strong victory in the nation’s wealthiest state of Maharashtra. It could be the catalyst India bulls need after the index fell into a correction (10% down from highs) in November. The alliance’s victory ensures policy continuity in the state, home to India’s financial powerhouse of Mumbai and several of the nation’s largest investments. Also, China’s stimulus acted as a headwind for India. With sentiment around China and economic stimulus efforts now waning, there could be more adoption of Indian stocks again.
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FX
The U.S. Dollar had another fantastic month in the spotlight for November. The DXY index traded up to 108.00, the highest level since late 2022. There were three main factors that drove the price action: