Shares post best year in four, volatile Treasuries flat on year
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[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.
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"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.
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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
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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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