And now, the end is near… what 2024 could have in store

Stock markets had their best year since 2019 in 2023, which isn’t bad considering there were some pretty dire predictions for stocks markets at the start of the year. From an FX perspective, it was a year of two halves for the US dollar. Overall, the dollar performed poorly in 2023, and out of the G10 currencies, it only rose vs. Japanese yen and the Norwegian krone. In the G10 FX space, the Swissie was the best performer vs. the USD in 2023, up more than 11%, with GBP as the second-best performer, up 6.38%, according to Bloomberg. The FX space certainly did not mirror economic performance in 2023, with the US economy storming ahead of its G10 rivals, yet the dollar still took a battering. This is yet another example of how financial markets do not reflect economic reality.

Swissie and UK lag global equity market peers

Looking at stocks, the Nasdaq was the best performer by far out of the major indices. It rose more than 43% YTD, while the S&P 500 rose 24%. The Dow Jones, which is focused more on the industrial players in the US, rose by a more modest 13.7% YTD. In Europe, Italy’s FTSE MIB was the top performer, rising 28% YTD, while Spain’s Ibex and Germany’s Dax rose by 22% and 20% respectively. This is a very respectable performance from European stocks and suggests resilience in these markets even when the ECB is tightening monetary policy and still sounding tough on inflation even when the Fed has pivoted to a less hawkish policy stance. Interestingly, the Swissie and the pound may have been the top performers in the G10 FX space, however, the Swiss and the UK stock markets were the weakest performers in Europe in 2023, rising by 3.8% and 3.7%, respectively. It is worth noting that in the last 30 days, European indices have been less volatile than their US counterparts, which could be something to do with lower liquidity due to the longer Christmas holiday enjoyed by Europeans compared to their US counterparts.

Diverging fortunes for Asia

The Nikkei in Japan was another top performer in 2023, outperforming the S&P 500, as the prospect of an end to negative interest rates spurred interest in Japanese stocks. The Chinese indices and the Hang Seng were some of the worst performers in the world, falling 11.38% and 13.8% respectively, after the Chinese economy stalled even after the end of China’s strict Covid restrictions at the start of the year.

The key drivers for markets in 2024

As we move into 2024, the key questions that we now need to ask include: 1, can the magnificent 7 continue to outperform and drive US stock markets? 2, can European indices continue to do well, even if the ECB sounds hawkish as credit conditions remain at extremely restrictive levels? 3, What comes next for China’s economy? The answers to these questions will drive financial markets in 2024, in our view, as the “everything rally” starts to fizzle out in Q1 2024. The euphoria about potential Fed rate cuts, currently there are a little over 6 rate cuts priced into the Fed Fund Futures market for 2024 as a whole, which seems excessive to us. At some stage, the market may need to roll back on some of these which could dampen overall market sentiment as we move through 2024.

Data watch as we move into January

The first hurdle for market sentiment, will be this week’s US Non-Farm Payrolls report, scheduled for release at 1330 GMT on Friday 5th January. Economists are expecting a 170k reading, down from 199k for November. The unemployment rate is expected to edge back slightly to 3.8% from 3.7%, while avg. hourly earnings is expected to dip back to 3.9% on an annual basis. If the economists surveyed by Bloomberg are accurate, then this could feed the “dovish Fed” narrative, and we could see the “everything rally” extend into mid-January. However, if we get a reading above 200k for NFPs, then it may give the market reason to pause, and potentially reverse some of the positive moves that we have seen in risky assets in recent months.

Other economic data to watch this week includes, the final readings of global PMI surveys, which were pretty dire the first time around, and Eurozone CPI for December, which is also scheduled for release on Friday. Headline inflation is expected to have risen slightly to 3% up from 2.4%, after volatility in the oil price last month. However, the downtrend in core inflation is expected to be maintained, with a further decline expected in the annual rate at 3.4%, down from 3.6% in November. If there is a weaker than expected decline in core CPI for the currency bloc, then we could see the EUR coming under pressure, as it would make it more likely that the ECB will change its tune at its next meeting and join the Federal Reserve in pivoting to a dovish policy stance. EUR/USD backed away from highs above $1.11 at the end of last year, and it ended 2023 at $1.1040. If the euro comes under further downward pressure, it could strengthen the USD, which many analysts are expecting to fall further in 2024.

What next for the FTSE 100?

We mention above that the FTSE 100 was one of the weaker performers in the global equity market space in 2023. However, when you dig below to a sectoral level, the picture is more mixed. Compared to other indices, the FTSE 100 was inconsistent in its performance last year. There were big losses for stalwarts like medical and drug manufacturers, which was part of a global trend. The basic materials sector also took a hammering, with Glencore down 14%, although Rio Tinto managed to eke out a gain rising just less than 1%. Unilever and British American Tobacco were down 9% and 30% respectively in 2023, while Vodafone also fell 18%, and Prudential was down 21% due to its exposure to Asia. But it was not all bad news for financial firms, with 3i rising 80% over the year. However, the consumer discretionary sector had a wonderful year. M&S was up more than 120%, which is the level of performance we have seen for some AI companies! Elsewhere, Next was higher by 39%, and Kingfisher by 3%. So, there are reasons to be hopeful for the FTSE 100 in 2024, if some of the UK’s biggest companies can stage a comeback, including Unilever, drug makers and Vodafone, along with the basic materials sector. It’s a big ask, but the FTSE 100 is not a linear index and it needs many plates to be spinning simultaneously to have a strong year in 2024.