Weekly Overview 6. – 12. Jan 2025

The content of this post does not constitute financial advice. It is intended for information and education purposes only.

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The Week in Global Markets

Financial markets summary:

– EUROPE: European stock markets were up across the board this week, likely driven by expectations for rate cuts by the ECB despite a re-acceleration of inflation. In the euro area, the HICP rose to 2.4% YoY in December, while in Germany it climbed to 2.8% YoY, with German CPI also climbing to 2.6% YoY. Persistent service prices and the rising cost of energy were the main contributors. In its latest Economic Bulletin for 2024, the ECB highlights that the risks to economic growth in the Eurozone remain tilted to the downside. There is a meaningfully higher risk of increased friction in global trade going forward, which could negatively influence exports and hit the global economy. Of particular concern is business investment in the euro area which contracted notably in the third quarter of 2024 and is likely to remain muted in the near term. Bank of France chairman François Villeroy commented that the pullback in inflation is expected to be confirmed in the coming quarters and that would mean returning to the neutral rate of interest. However, in a survey by the Financial Times of Eurozone economists, it was shown that 46% think that the ECB has ‘fallen behind the curve’ in cutting interest rates as it has been too slow and out of sync with economic fundamentals (43% thought it was right on track). The economists polled are also not as optimistic on EZ growth as the IMF, for example, and expect growth to be only 0.9% in 2025. In the UK and the euro area, the combination of the rise in government bond yields (e.g., see 10y yields) and the weakening of the pound and the euro against the US dollar is sending important signals to investors and policymakers. It does point to likely limits in terms of fiscal headroom and economic growth, which could lead to stagflation. This is important in the context of the expected shifts in US trade policies – as the threat of tariffs and frictions looms, markets will put more pressure on governments to refocus their efforts toward structural measures that promote competitiveness and productivity instead of debt-funded redistribution and unsustainable spending. However, unlike in the UK where this can be managed on a single-country level and the Bank of England can resist to some extent fiscal dominance, leading to higher yields, the Eurozone does not have this luxury as its policy brings about low yields for highly indebted countries, creating a mispriced bond market. One thing is clear for both the UK and the euro area at this point – the market (especially foreign bond buyers) is becoming increasingly intolerant to unsustainable fiscal management.

– UNITED STATES: The three main US stock market indices were down this week, and so was the Russell 2000. In fact, small-cap stocks performed worse than large-caps again, and growth stocks underperformed value stocks week-on-week. The jobs reports (NFP and JOLTs) for December were positive, outperforming expectations for job creation by over 100k and remaining at or close to all-time highs on hiring and layoff rates. Nevertheless, investors were not impressed and US long-term yields continued to move higher while stocks corrected. Inflation expectations did go up, but so far it appears that the rise in yields in 2024 came entirely from an increase in the term premium and not from rising inflation expectations. The markets have also been repricing the number of rate cuts the Fed is expected to make, which has now gone down to 2x25bps. Despite that, the level of inflation expectations for the medium term (5-10 years ahead) has clearly reached uncomfortable levels, with the UMichigan indicator rising to its highest values since 2008 (the financial crisis). OIS swaps are even pricing no further rate cuts by the Fed until October 2025 (CME FedWatch tool points to June) and the 10-year US Treasury yields have now risen about 120bp since the September rate cut. The so-called “Fed pivot” (the cutting cycle) might be postponed as inflation fears may be taking over, cascading the effect down to stock markets and leading to elevated volatility. The Minutes from the FOMC meeting in December confirmed that Fed officials are comfortable with holding rates steady for longer given the “increase of upside risks to inflation”.

– ASIA-PACIFIC: Both the Nikkei 225 and the TOPIX index declined this week, while the Japanese yen weakened against the US dollar to above the 158 level, likely driven by the uncertainty surrounding the BoJ’s next steps. Once again, the finance minister of Japan indicated that authorities are ready to repeat their intervention in FX markets to counter rapid currency moves caused by excessive one-sided speculation. The yield on 10y JGB continued to rise, reaching 1.19%, most likely influenced by the move in US Treasury yields and the shift in rate cut expectations by the Fed. The Bank of Japan appears to be worried by the economic policies signaled by the incoming US administration, which probably caused investor expectations to adjust – with a hike now seen as more likely for the end of Q1 or the start of Q2. In China, with deflation staying firmly entrenched, stocks took another dip. In fact, their performance for the first 7 days of this year was the worst since 2016. The PBoC signaled its intention for a looser monetary policy this year to aid growth, with targeted financial support aimed at certain sectors and lower reserve requirements and interest rates to help increase consumption. China’s finance ministry also reaffirmed it will increase public spending and increase the budget deficit to boost growth. On Friday, the central bank said it will suspend buying government bonds in order to temper investor bets on weak economic growth that have undermined the currency and sapped confidence among businesses and consumers. This is happening at the same time as bond yields had slumped to an all-time low, driven by bets on aggressive policy easing. The demand is high due to the prolonged struggles in the property sector and ongoing deflation concerns (some even fearing a deflationary spiral).

– BITCOIN: After its latest flirt with over-$100k prices, BTC has now fallen back to the $94k level and is holding around it. Technical analysts point out that this might likely be a temporary correction that could last for some time or be accompanied by some volatile price action before the next breakout. For instance, comparing it to the 2016-2017 cycle, it might appear that the price actions are in sync (so far). Nevertheless, risks related to individual address holding concentration and the moves in Microstrategy stock have flagged some key concerns. Additionally, the Relative Strength Index (RSI) is trending down and is currently at 45, which is neither oversold nor overbought, but has fallen by over 20% since Jan 6th. Some analysts even fear a bigger correction as a possibility around the time of Donald Trump’s inauguration, especially if looser regulation promises are not fulfilled.