Year-End Struggle For Equities
Author: Marco Santanche
A struggling beginning for stocks - Happy New Year to our fellow readers! I hope all of you had a better start of the year than the Nasdaq Composite.
Stocks struggle ahead of the Fed's December minutes release, as 10y treasury notes rise, reflecting investors' apprehension about future meetings. Despite the year-end hinting at a more dovish approach for 2024, the current market pricing expresses some doubts regarding the imminence of global easing. Even Richmond Federal Reserve President Thomas Barkin confirmed the progress of the central bank in taming inflation without damaging the job market. He also pointed to the growing likelihood that the economy as a whole will finally exit the high inflationary period, signaling a potential shift in the economic landscape.
Current forecasts, as per FedWatch, suggest that interest rates are likely to remain unchanged, further postponing the much-anticipated rate cute. In another concerning development, the US Treasury Department announced that public debt has reached $34 trillion for the first time, heightening political uncertainty. Addressing this, White House spokesperson Michael Kikukawa revealed President Biden's plan to trim the US deficit by $2.5 trillion over the next decade. This reduction strategy involves imposing additional taxes on large corporations and wealthy Americans.
Despite these challenges and risks, the outlook for 2024 remains optimistic, much like it was for 2023, particularly with the anticipated campaign for rate cuts. The current market correction is viewed as an ideal opportunity for investors, potentially marking the beginning of another robust year.
Oil recovers, gold slumps, and dollar rises: Market turbulence is rapidly spreading. Gold is declining due to the strengthening USD, which usually benefits from higher yields. However, escalating tensions in the Red Sea, particularly due to Yemeni militants' attacks on cargo vessels, are providing some support to gold prices by threatening the global supply chain for various commodities and materials.
In the oil sector, supply disruptions are emerging from Libya, where local protests have led to the closure of the Sharara field. Viktor Katona of Kpler suggests this could significantly influence Brent crude prices. Additionally, increasing geopolitical tensions in the Middle East, including in Lebanon and Yemen, add to the market's uncertainty.
As OPEC+ countries prepare for their February meeting, with potential further supply cuts on the table, there's a growing likelihood of a short-term increase in oil prices. This comes ahead of the anticipated US Crude and product inventory reports.
The Dollar Index (DXY) has seen a surge, propelled by heightened demand for US treasuries ahead of the upcoming Fed meeting. The New Zealand Dollar (NZD) dipped, while the British Pound (GBP) experienced a slight recovery after an initial drop at the start of 2024.
All markets are correlated during downturns, and the beginning of the year is no different. Geopolitics is worsening and worrying a bit more than what we experienced in November, but as long as wars and conflicts do not escalate, there should be no major long-term financial repercussions. This sentiment is currently reflected across various markets, including ETFs.
ETFs and hedge funds for this year - All eyes are on BTC. The long awaited bitcoin ETF is going to be approved or will face further delays on January 10. The market is currently pricing in positive news, leading to the risk that a negative surprise will cause an overreaction in sales. However, the prevailing expectation is a positive scenario.
The potential approval of the BTC ETF, coupled with the approaching Bitcoin halving event, sets the stage for a possible sharp price increase in 2024, reminiscent of the surge experienced in 2023.
Ethereum is also expected to rise due to incoming upgrades to the network, while Binance might see a catalyst in the outcome of former CEO Changpeng Zhao after the verdict on his trial.
In traditional finance, AllianceBernstein's launch of a mutual fund in China marks a notable development. This move follows the 2020 deregulation, which removed foreign ownership limits in the sector.
The spotlight in China is also on the newly launched A50 Index, which concentrates on 50 leading sector companies. Already, seven mutual fund companies have shown interest in launching funds that track this index. The A50 Index is particularly appealing due to its lower emphasis on financial companies and a greater focus on innovation-driven sectors.
Goldman Sachs is also launching a $650M life sciences fund, focused on startups in the space. This follows the successful $4B capital raising campaign for its infrastructure fund.