January 2 0 2 4 • I S S U E 37

December Markets

*Source: investing.com (1 February 2024)*

Global market performance was mixed across asset classes in January. Developed market equities were up 1.2% overall with the STOXX 600 up 1.50%, the FTSE All-Share down 1.13%, and the S&P 500 up 2.17% for the month. Emerging market equities performed poorly in contrast, down 4.6% overall, with the Shanghai Composite down 6.13%. Brent Crude was up 6.64% for the month, reflecting disruptions to key shipping channels in the Middle East after the US and its allies’ airstrikes on the Houthi Rebels. Global government bonds were down 1.8% for the month, with hopes dampened for a March rate cut by the US Federal Reserve (Fed).

In the US, the S&P 500 reached record highs in January with continued hopes of a ‘soft landing’ driving strong performance by the ‘Magnificent Seven.’ A strong labour report showed 216,000 jobs added to the US in December. While the continued strength of the labour market means good reason for optimism for the US economy, it also means that the Fed is less likely to cut rates as early as the market expects. This was highlighted at the Fed’s January 31st meeting where the Fed pushed back on a potential March rate cut labelling it as unlikely. Headline inflation rose to 3.4% year-over-year (YoY) for December, up from 3.1% previously.

The European Central Bank (ECB) kept rates on hold at its January meeting, reaffirming its commitment to be data-dependent. Notably, the European High Yield Bond Market was an outlier in achieving positive returns relative to global fixed income, up 0.9% over January. Business activity in the region contracted for the eighth straight month. The region's preliminary Composite PMI rose to 47.9 for January up from 47.6 previously, remaining in contractionary territory (below 50). Tensions in the Middle East caused price pressures to rise, with YoY inflation rising to 2.9% from 2.4% previously.

Despite the equity market falling during January, there were some signs for optimism in the UK. The Flash Composite PMI increased by 0.4 further into expansionary territory to 52.5 while consumer confidence hit a two-year high. Headline inflation did however rise slightly, up to 4.0% YoY from 3.9% previously. Imminent rate cuts by the Bank of England (BoE) are believed to be unlikely, with sticky services inflation and persistently high wage growth proving to be obstacles.

The People’s Bank of China (PBoC) announced stimulus measures in an attempt to reignite economic growth in the region. However, this seemingly did not have the impact the market had hoped, reflected in the poor performance of major indexes, with the MSCI Emerging Markets Index declining 4.6% for the month. Average growth estimates, from five top-tier firms including Goldman Sachs and Morgan Stanley, expect GDP growth of 4.6% for 2024, down from the 5.2% expected for 2023.

All in all, the markets have shown mixed performance in the first month of 2024. Just as in 2023, the policy actions of central banks will be key to watch going forward. However, differing from last year, the main focus is likely to be on the level and amount of rate cuts.

Middle East Update – Implications for the broader Global Economy

A prominent name in the news lately whose actions have had far-reaching economic and geopolitical consequences have been the Houthi Rebels. The Houthis are an armed group that controls most parts of Yemen.

The conflict in Yemen between the Houthi rebels and the internationally recognised government, supported by a coalition led by Saudi Arabia, has been ongoing since 2014. In addition to the domestic strife, the involvement of external powers has resulted in consequences for both the Yemeni population and the global economy. This article sheds light on the recent US and UK bombings of Houthi positions and analyses how these military actions affect financial markets worldwide.

As Yemen borders the strategic Bab el-Mandeb strait and given Iran's alleged involvement, any escalation in the conflict can lead to concerns about the safety of oil transport in the region. Such apprehensions tend to push oil prices upwards as investors fear potential supply disruptions. Consequently, higher oil prices can have broad-reaching effects on global financial markets, affecting inflation rates, consumer spending, and the profitability of various industries. To illustrate this, in the aftermath of the recent airstrikes from the US and its allies on more than a dozen Houthi targets, Brent crude jumped in price by about 2.5%.

These attacks were in retaliation to attacks from the Houthis on merchant shipping vessels in the Red Sea and led to fears that there could be further disruptions to shipping. Given this as well as fears of an escalation to a broader regional conflict, many analysts believe there is certainly further upside risk for oil as we go further into 2024.

In terms of stock markets, rising geopolitical tensions can impact investor sentiment and confidence, leading to increased market volatility. Industries particularly susceptible to the Yemen conflict include defence, energy, shipping, and companies with significant exposure to the Middle East. In this case the broader stock market seems to be largely unaffected so far, with the S&P 500 up around 3.8% and the STOXX 600 up 1.8% year-to-date as of the 31st of January. Positive market sentiment coming from expectations that the US Federal Reserve, as well as other major central banks will start cutting rates sooner than expected seems to be outweighing fears of rising geopolitical tensions. However, investors need to continue monitoring these situations going forward, with the benefits of active management likely to be illustrated.

During times of geopolitical unrest, investors often seek refuge in safe-haven assets, including the likes of gold, and government bonds. As a result, the prices of these assets traditionally tend to rise. In response to the recent airstrikes, the price of gold rose by 0.45%. Whilst it is a rise, it is not an overly significant rise, further emphasising the fact that the current rising geopolitical tensions have not yet led investors to panic in terms of moving too fast into safe-haven assets.

The economic consequences of the bombings of Houthi targets by the US and its allies have been felt to some degree and mostly within the oil market. While the situation has the potential to escalate and cause headwinds for the global economy, it is important to mention that positive sentiment is seemingly still prevailing in the market at large. It is important for investors to monitor situations such as these and ensure their portfolios provide adequate investor protection.