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Dot Plot Shock
December 21
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Hello Traders, we hope you’re enjoying the holiday season. In this special edition of our weekly review, our final issue for the year, we'll revisit some of 2024's biggest stories, including:
Dig deeper into these stories in this week’s review.
US stocks kept on surging to new records in 2024, driven by lower interest rates, a frenzy for all things AI, and, most recently, bets that Trump’s incoming administration will deliver sweeping tax cuts and reforms that benefit corporate America. The former president is set to return to the White House at the start of 2025 after winning the presidential election in November. What’s more, the Republicans gained control of the Senate and held onto their majority in the House, which will allow them to more easily pass legislation.
On interest rates, the Fed embarked on its first easing cycle since the pandemic with a half-point cut in September. The bigger-than-expected move suggested that the central bank was trying to preempt any potential weakening in the US economy and labor market after holding rates at a two-decade high for over a year. Since then, the Fed has lowered interest rates two additional times.
Regarding AI, the frenzy continued in 2024, driving a select group of major US tech firms – dubbed the "Magnificent Seven" – to new heights. Their sheer size also helped propel the entire US stock market upward. To put the AI frenzy into perspective, consider these few tidbits:
The UK’s Labour Party won July’s general election by a landslide, securing a huge parliamentary majority and ending 14 years of Conservatives rule. The party pledged to boost economic growth, keep spending tight, rein in debt, build new homes, upgrade crumbling infrastructure, and more.
A month later, the BoE delivered its first rate cut since the pandemic. Members of the Monetary Policy Committee voted five to four in August to reduce the bank’s key rate by a quarter of a percentage point to 5%, after having kept it at a 16-year high for a year in an effort to bring down inflation. Since then, the BoE has lowered interest rates an additional time.
The UK government's budget deficit – the difference between its revenues and expenses – has been widening, with more money being spent on energy subsidies, social services, public-sector pay, and interest payments on debt. To plug the gap, the government is turning to bond sales as a means of raising funds. And all those extra liabilities sent the UK’s national debt pile, relative to the size of its economy, to 100% for the first time since 1961 this year.
In a widely telegraphed move, the European Central Bank delivered its first interest rate cut in nearly five years in June, moving faster than its US and UK counterparts in lowering borrowing costs after the biggest inflation surge in a generation. Since then, the ECB has lowered interest rates three additional times in a bid to boost the bloc’s stagnating economy, which is particularly vulnerable to the risk of a trade war.
See, Trump’s proposed 10% to 20% tariff on all goods coming into the US would dent European exports, dealing a blow to the region’s manufacturers. What’s more, the president-elect’s vow to slap a 60% tariff on Chinese imports could inevitably cause many products to be redirected to the European market, further squeezing manufacturers there. While the bloc could respond by imposing its own tariffs, the move would risk escalating into a full-scale trade war on multiple fronts. Adding to the region’s woes, Germany and France – the eurozone’s biggest two economies – are grappling with political turmoil driven by their growing budget deficits.
The Bank of Japan delivered its first rate hike since 2007 in March, scrapping the world’s last negative interest rate as well as a whole bunch of other unconventional tools designed to encourage spending over saving. The decision came as the BoJ became increasingly confident that its 2% inflation target was finally within sight.
The BoJ also scrapped its yield curve control program, which consisted of not only keeping short-term rates low but also explicitly capping longer-term ones. However, it pledged to continue buying long-term government bonds as needed. The bank also discontinued purchases of exchange-traded funds and Japanese real estate investment trusts. The BoJ adopted the highly unusual measure in 2010, but with Japanese stocks hitting all-time highs this year, it was fair to say that the equity market no longer needed support.
Chinese authorities unveiled a broad package of stimulus measures in September aimed at reviving growth in the world’s second-biggest economy. First, the seven-day reverse repo rate, the central bank’s main policy rate, was lowered to 1.5% from 1.7%. Second, the reserve requirement ratio – the amount of money banks must hold in reserve – was cut by 0.5 percentage points to its lowest level since 2018, adding 1 trillion yuan in liquidity to the banking system.
Third, measures were announced to shore up the nation’s troubled property sector, including lowering borrowing costs on outstanding mortgages and easing the minimum down-payment ratio for second-home purchases to 15% from 25%. What’s more, the Chinese central bank said it’ll cover 100% of loans for local governments buying unsold homes with cheap funding, up from 60%. Fourth, officials announced a 500 billion yuan fund to help brokers, insurance companies, and investment funds buy stocks. The central bank said it’ll also provide 300 billion yuan to help companies conduct share buybacks.
While the policy package likely helped put China’s economic growth targets back within reach, doubts remained about whether it would be enough to alleviate the country’s longer-term deflationary pressures and entrenched real estate crisis.
Related to that, China’s 30-year bond yields fell below Japan’s for the first time ever this month, sparking concerns among some investors about the potential “Japanification” of the Chinese economy, where it becomes mired in deflation. Put differently, some observers reckon that certain conditions in China’s economy today echo those seen in Japan in the 1990s, when the bursting of a real estate bubble led to decades of deflation and stagnation.
So, in a bid to boost the economy and avoid a negative spiral of falling prices and economic activity, Chinese authorities announced this month that they’re changing their stance on monetary policy from “prudent” to “moderately loose”. The last time the country adopted a moderately loose monetary policy stance was from late 2008 to late 2010, as part of a massive stimulus package to support the economy following the Global Financial Crisis. So the sudden change of stance this month was taken by investors as a sign that the leadership was finally taking China’s economic problems more seriously.
Indian stocks have been part of major emerging markets indexes for some time, but the country's sovereign debt has never received the same recognition. After all, the government doesn’t issue any bonds denominated in foreign currencies, and its local rupee ones have historically been inaccessible to international investors.
But that changed in early 2020. As the pandemic was ravaging India’s economy and the government was borrowing at record levels to fund a huge stimulus package, it opened a wide swath of its sovereign bond market to overseas investors. That newfound access, combined with surging interest to invest in the world’s fastest-growing major economy, prompted JPMorgan to announce in September last year that it’ll be adding Indian government debt to its biggest emerging markets bond index. And the move, which officially took effect this June, was the country’s first-ever admittance in a global bond index.
The milestone was a win-win for investors and India. For investors in the hundreds of billions of dollars of funds that track or are benchmarked to the JPMorgan emerging market bond index, they got access to India’s $1.3 trillion sovereign debt market, which has been offering some of the highest returns among its peers lately.
For India, the move heralded greater connectivity between its domestic financial markets and foreign ones, helping it expand the investor base for its sovereign debt, raise more funds, and lower borrowing costs. But on the flip side, increased foreign flows will also make the country’s bond and currency markets more volatile, which could push the government and central bank to intervene more actively.
The price of gold hit several record highs in 2024, and is set to end the year up around 30%. There were several factors that drove the rally. First, interest rates fell in most parts of the world, reducing the opportunity cost of owning gold, which doesn’t generate any income. Second, central banks snapped up loads of gold to diversify their reserves away from the dollar. Third, gold benefited from increased safe-haven demand amid heightened economic and geopolitical risks, including slowing global growth, election uncertainties, rising government debt levels, elevated China-Taiwan tensions, and conflicts in the Middle East and Ukraine.
To put gold’s growing demand this year into perspective, consider this: global gold purchases increased by 5% in the third quarter compared to the same period last year, hitting a record 1,313 metric tons. Coupled with surging prices, the value of global demand hit a record $100 billion in the third quarter. And here’s another milestone the shiny metal hit this year: a standard gold bar, typically weighing about 400 ounces, became worth over $1 million for the first time ever.
In an effort to reverse falling oil prices, OPEC+ has announced several production cuts and extensions to these curbs since 2022. At nearly six million barrels a day, these curbs represent roughly 6% of global output. However, faced with a slowdown in global oil demand and a huge surge in supply from the US, OPEC+ extended those cuts several times this year. In its latest decision, announced in December, the cartel agreed to begin increasing oil production in April 2025 and at a slower pace than previously planned.
In a significant development eagerly anticipated by cryptocurrency enthusiasts, the SEC approved the first ETFs that directly invest in bitcoin in January. These funds, long sought by firms like BlackRock, Fidelity, Invesco, Grayscale, and WisdomTree, allow investors to access bitcoin by simply purchasing shares, similar to buying stock. That whole new way to easily invest in bitcoin without directly owning the asset in a digital wallet drew a lot of new retail and institutional investors to the coin. Case in point: the new spot bitcoin ETFs saw net inflows of $833 million in their first three days of trading. And by November, they had amassed over $100 billion in assets.
Speaking of bitcoin, the world’s biggest cryptocurrency surged to new record highs this year, breaching the $100,000 mark for the first time ever. Demand for the new spot ETFs played a major role, sure, but the entire crypto sector got a massive boost after Trump won the US presidential election. Traders’ excitement stems from Trump’s pro-crypto stance and the expectation of a more favorable regulatory environment under the incoming administration. Case in point: the crypto market’s combined market capitalization jumped by over $1 trillion since the election, according to CoinGecko.
General Disclaimer
This content is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell. Investments carry risks, including the potential loss of capital. Past performance is not indicative of future results. Before making investment decisions, consider your financial objectives or consult a qualified financial advisor.
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