Shares post best year in four, volatile Treasuries flat on year

[December 29, 2023]  By Ankur Banerjee and Alun John

SINGAPORE/LONDON (Reuters) -World shares took a breather on the last trading day of the year but were heading for their best annual performance since 2019, while U.S. Treasuries are set to finish the year broadly where they started, camouflaging some wild moves for the benchmark in 2023.

Shares around the world have risen sharply in the last two months of the year, as benchmark bond yields fell on the back of expectations of central bank rate cuts early in 2023.

The S&P 500 closed on Thursday just 0.3% shy of its record closing high, reached on Jan. 3, 2022. Futures for the index are up 0.1%, leaving traders on edge to see whether the benchmark will reach a new peak before the year-end.

The S&P500 is up nearly 25% this year thanks to a massive rally in megacap tech stocks, while Europe's STOXX 600, currently around a 23-month peak, is heading for a 12% yearly gain, and MSCI's world share index a 20% gain, its most in four years.

All rallied sharply in November and December.

"We have eaten a lot of the returns that were expected in 2024. The positive momentum in markets is obviously associated with the fall in yields, and so now the question is how long can this trend continue?" said Samy Chaar, chief economist at Lombard Odier.

"It doesn't necessarily have to stop, future returns are probably more moderate than they were at the beginning of November, but if you think the long end of the U.S. curve can settle around 3.5%- 4%, which is where we are now, there is little danger of a big U-turn, and if companies can continue to generate profits there might still be a few percent of upside."

The benchmark 10-year Treasury yield was 3.885%, up 3 basis points on the day, and remarkably just 5 basis points above its level at the start of the year.

That yearly performance masks some major swings, as the note's yield reached 5.021% in October, its highest since 2007, before retreating and driving the share rally.

Behind the move lower in yields has been a sustained decline in inflation around the world that has driven expectations that central banks will be cutting interest rates early next year, even as the U.S. economy has broadly remained strong.

Markets are pricing in a 88% chance of the U.S. Federal Reserve starting its rate cuts in March, according to CME FedWatch tool, compared to 35% chance at the end of November. Traders are also pricing in over 150 basis points of easing next year by the Fed, the European Central Bank, and the Bank of England.

Signage for the London Stock Exchange Group is seen outside of offices in Canary Wharf in London, Britain, August 3, 2023. REUTERS/Toby Melville/File Photo

Spanish inflation was a rare piece of economic data during the quiet period between Christmas and New Year. The country's European Union-harmonised 12-month inflation was unchanged from November at 3.3%, though below the 3.4% expected by analysts polled by Reuters.

CHINESE UNDERPERFORMANCE

Chinese markets have been standout underperformers, despite optimism at the start of the year when Beijing ended its zero-COVID policy.

Both Hong Kong's Hang Seng Index and China's onshore bluechip index lost more than 10% in the year on waning investors confidence in the world's second largest economy. [.SS]

In the currency market, the dollar was rooted on the back foot and headed for a 2% decline this year after two years of strong gains, with declines mirroring the fall in U.S. yields.

Against a basket of currencies, the dollar was last at 101.25, edging away from the five month low of 100.61 it touched on Wednesday. [FRX/]

In commodities, Chicago wheat and corn futures were set for the biggest annual drop in a decade as easing supply bottlenecks in the Black Sea region and higher production weighed on prices. [GRA/]

Oil prices were due to end 2023 down 10% after a year of wild swings driven by geopolitical concerns, production cuts and global measures to rein in inflation.

On Friday, U.S. crude rose 0.7% to $72.06 per barrel and Brent was at $77.69, up 0.7%. [O/R]

Gold prices rose a touch on Friday and were poised to end their best year since 2020. Spot gold was at $2,064.7 an ounce. [GOL/]

(Reporting by Ankur Banerjee, Editing by Raju Gopalakrishnan)

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