30/12/2024  

Last Days of 2024 for Markets

Financial Markets Outlook Summary

Economic Data and Market Indicators

• Upcoming Data Releases: The ISM Manufacturing Report is set for release, with an expected slight decline to 48.2, suggesting ongoing contraction in manufacturing activity. Housing data and jobless claims will also be monitored, particularly after a recent rise in continuing claims to 1.91 million.
• Jobs Market: Broader labor data indicate strength, but an unexpected rise in jobless claims could signal softening. The December jobs report is due next week.

Equity Markets

• Recent Performance: Equity markets rebounded late last week, driven by a $2 billion buy imbalance, but breadth was weak. Tech heavyweights, including Nvidia, Tesla, and Microsoft, were significant detractors, with broader indices reflecting a challenging environment.
• Year-End Trends: Investors anticipate a “Santa Claus rally” in the last trading sessions of 2024, historically yielding modest gains.

Fixed Income and Yield Curve

• Interest Rates: Long-term yields are climbing, with the 30-year Treasury reaching 4.82%. The yield curve steepened further, with the 2-year/10-year spread widening to 29 bps, a development that typically pressures equities.
• Rate Expectations: Forward-looking contracts indicate a potential 20-50 basis point increase in rates over the next year, aligning with reduced leverage demand amid elevated financing costs.

Emerging Markets

• Currency Volatility: Emerging market currencies, including the Brazilian real and South African rand, faced significant declines. Brazilian 10-year yields surged past 15%, reflecting fiscal instability and investor caution.
• Broader Risks: Persistent fiscal challenges in Brazil and Colombia underscore vulnerabilities in emerging markets, with sovereign credit spreads widening.

Global Markets

• Asia and Europe: Japan’s Nikkei ended the year on a subdued note, while the eurozone saw bond yields rise, with UK gilts nearing their highest levels since 2008.
• U.S. Markets: The S&P 500 gained 0.7% for the week, driven by strong economic data and easing inflation, though volatility remains elevated in tech sectors.

Deleveraging and Liquidity Risks

• Equity Financing: A sharp decline in BTIC S&P 500 futures suggests reduced leverage demand, likely tied to rising rates and end-of-year portfolio adjustments.
• Repo Market Concerns: Elevated rates in the U.S. funding market reflect constrained dealer balance sheets, raising potential instability in short-term financing.

Sector Highlights

• Technology: AI and semiconductor spending continue to fuel investment, though concerns about over-leverage and speculative risks in the tech sector persist.
• Energy and Commodities: WTI crude ended slightly higher at $70.60 per barrel, while gold held steady, reflecting a mixed sentiment across commodities.

Macro and Geopolitical Risks

• Trade and Policy Uncertainty: Escalating tensions in trade policies, particularly involving the U.S. and China, may disrupt supply chains. Tariff threats loom, with potential ramifications for global markets.
• Emerging Political Risks: Political instability in South Korea and fiscal stress across Latin America could exacerbate regional and global economic pressures.

Outlook

Market participants face heightened uncertainty as they navigate a confluence of rising interest rates, geopolitical risks, and potential deleveraging pressures. While equities aim for a year-end rally, broader challenges, including fiscal vulnerabilities in emerging markets and liquidity constraints, could dampen sentiment into 2025.

IMPORTANT DISCLAIMER

The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.

a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.