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February 2, 2024
Capital Market Report Q4 2024
Investor Optimism Despite Uncertainties
During the analysis period (September 7 – December 2, 2024), financial markets showed optimism. Despite geopolitical and economic uncertainties, stable economic developments in the US led to rising equity markets and falling credit spreads. At the same time, a strong US dollar and higher government bond yields led to a tightening of financing conditions.
Development of Bond Markets
Government bond yields rose globally, with the US leading with particularly high increases. Despite interest rate cuts by the US Federal Reserve, yields rose as economic development remained strong.
- In Europe, growth was weaker, which is why interest rate expectations remained lower.
- Japanese yields rose moderately as the Bank of Japan gradually normalized its loose monetary policy.
- Spreads between government bonds and swaps became more negative, indicating high demand for capital for government financing.
Equity and Credit Markets: Risk Appetite Remains High
Despite geopolitical risks, equity and credit markets remained strong:
- US equities reached new highs after the elections.
- In China, announced stimulus measures led to short-term price gains.
- Corporate bonds achieved tight spreads, indicating strong demand for riskier assets.
- At the same time, the costs for hedging risks remained at an elevated level.
Tightening of Financial Conditions in Emerging Markets
Emerging markets saw a deterioration of financial conditions:
- Most equity markets fell.
- Currencies depreciated against the US dollar.
- Government bond yields rose, particularly in Latin America.
- China: Despite economic stimuli, growth concerns persisted.
- Currencies: Volatility increased, making carry trades less attractive.
Commodity Markets and Inflation Expectations
- The slowdown in China's growth put downward pressure on commodity prices, especially for agricultural commodities and metals.
- Gold and silver initially rose as a hedge against geopolitical risks but depreciated again after the US elections.
- Inflation expectations fell in most regions, although uncertainties about future monetary policy increased.
Implications for Monetary Policy
- Central banks face challenges regarding "terminal rates" – the long-term interest rate level required to stabilize the economy.
- While the US continued to deliver positive growth surprises, inflation in Europe remained below expectations, making larger interest rate cuts there more likely.
- The Bank of Japan remains on a cautious normalization path.
Fiscal Challenges and Government Debt
- Rising government debt led to negative swap spreads, as investors demand a higher premium for holding government bonds.
- In the US, France, and the UK, there are growing concerns regarding high deficits.
- In Japan and the Eurozone, the reduction of central bank balance sheets (quantitative tightening) exacerbated market dislocations.
Conclusion and Outlook
- Markets remain optimistic despite global uncertainties, particularly in the US.
- Central banks face the challenge of adapting monetary policy to a changing economic environment.
- Emerging markets are struggling with currency and capital outflows, while the strong US dollar and high yields exert additional pressure.
- Fiscal risks and high debt could impact the stability of global financial markets in the coming months.