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Last week, the MSCI All Country World Index (MSCI ACWI) rose 0.8% (9.3% in November, 17.7% YTD). November was the strongest month for MSCI ACWI since November 2020.
In the US, the S&P 500 Index closed 0.8% higher (9.1% in November, 21.5% YTD). The technology-heavy Nasdaq Composite Index advanced 0.4% (10.8% in November, 37.8% YTD). The S&P 500 and Nasdaq Composite rounded out on Thursday their best monthly gains since July 2020. Falling Treasury yields seemed to continue to boost sentiment, and a broad index of the bond market recorded its best monthly gain since 1985.
Growth stocks underperformed value stocks and large-caps underperformed small-caps. The Russell 1000 Growth Index returned 0.4% (10.9% in November, 37.2% YTD), the Russell 1000 Value Index 2.0% (7.5% in November, 6.8% YTD) and the Russell 2000 Index 3.1% (9.0% in November, 7.2% YTD).
In Europe, the MSCI Europe ex UK Index gained 1.3% (7.4% in November, 14.1% YTD), as a steep decline in inflation and falling bond yields lifted investor sentiment. Major stock indexes rose as well. Germany’s DAX Index rallied 2.3% (9.5% in November, 17.8% YTD), France’s CAC 40 Index put on 0.7% (6.3% in November, 16.8% YTD) and Italy’s FTSE MIB Index climbed 1.7% (8.1% in November, 32.5% YTD). Switzerland’s SMI Index ended up 0.1% (4.5% in November, 4.7% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.09 for EUR.
In the UK, the FTSE 100 Index tacked on 0.6% (2.3% in November, 4.7% YTD) and the FTSE 250 Index lost -0.2% (7.1% in November, 0.8% YTD). The British pound appreciated versus the US dollar, ending the week at USD 1.27 for GBP, up from 1.26.
Japan’s stock markets fell over the week. The TOPIX Index declined -0.3% (5.4% in November, 29.0% YTD) but the TOPIX Small Index advanced 0.4% (4.3% in November, 23.2% YTD). Japanese shares were subject to some profit taking after rallying in November on expectations that US interest rates had reached their peak, while a strong corporate earnings season and weakness in the yen had also provided a favourable backdrop.
Over the week, the yield on the 10-year Japanese government bond fell to 0.69%, from 0.77%, tracking recent weakness in US bond yields on dovish remarks from US Fed policymakers amid signs of slowing economic activity.
The yen strengthened to 146.8 against the US dollar from the prior week’s 149.4. This was in an environment of general weakness in the greenback, as anticipation grew that the Fed could start cutting rates next year.
In Australia, the S&P ASX 200 Index rose 0.5% (5.2% in November, 6.1% YTD) as US treasury yields continued to abate on dovish Fed speech and Australia CPI cooled in October. Australian government bond yields reversed the increase in the previous week. The Australian dollar strengthened against the US dollar by 0.3% as market started to price in an earlier Fed rate cut in 2024.
MSCI Emerging Markets Index closed 0.2% higher (8.0% in November, 5.5% YTD), with a positive contribution to performance from the stock markets of Taiwan, India, South Korea and Brazil and a negative contribution from that of China.
Chinese equities retreated as official indicators underscored concerns about the country’s fragile recovery. The Shanghai Stock Exchange Index gave up -0.3% (0.4% in November, 0.8% YTD) and the blue-chip CSI 300 Index decreased -1.6% (-2.1% in November, -7.9% YTD). In Hong Kong, the benchmark Hang Seng Index fell -4.1% (-0.2% in November, -11.7% YTD).
In Türkiye, the central bank held its regularly scheduled meeting and raised its key policy rate, the one-week repo auction rate, from 35.0% to 40.0%. While this is well above the 8.5% level, where it was as recently as May, year-over-year inflation is slightly more than 61%, so real (inflation-adjusted) interest rates are still well below 0%.
In the central bank’s post-meeting statement, policymakers noted that “domestic demand, the stickiness in services inflation and geopolitical risks” are supporting price pressures. However, they also noted that “domestic demand has started to moderate” and that factors such as “improvement in external financing conditions, continued increase in foreign exchange reserves,” and increased demand for lira-denominated assets are contributing “significantly to exchange rate stability and the effectiveness of monetary policy.”
Policymakers concluded that “the current level of monetary tightness is significantly close to the level required to establish the disinflation course. Accordingly, the pace of monetary tightening will slow down, and the tightening cycle will be completed in a short period of time.” Policymakers remain committed to bringing inflation down to 5% in the medium term and intend to keep monetary policy tight “as long as needed to ensure sustained price stability.”
In Mexico, the central bank held a press conference following the publication of its quarterly monetary policy report. T. Rowe Price emerging markets sovereign analyst Aaron Gifford notes that policymakers’ previous inflation forecasts remain intact, estimating a return to the 3% inflation target by the second quarter of 2025. This is despite a meaningful upgrade to GDP growth, with the economy seen expanding by 3.3% in 2023 (versus a 3.0% estimate in the previous report) and 3.0% next year (versus a previous projection of 2.1%).
Based on a recent research trip to Mexico City, Gifford believes that many additional growth drivers could increase Mexico's productive capacity without pressuring inflation. For example, many of the government’s infrastructure projects and nearshoring-related activities fall under this category. Importantly, central bank Governor Victoria Rodriguez Ceja mentioned that the inflation forecasts include all of these variables and others, such as fiscal expansion.
While the Board of Governors acknowledges that inflation risks are still to the upside, there’s a growing consensus that real interest rates (calculated by subtracting 12-month ahead inflation expectations from the policy rate) are too high in Mexico, even as inflation has declined significantly. In this sense, Gifford believes that many Board members are warming up to the idea of interest rate cuts as soon as the first quarter of next year.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 1.5% (3.4% in November, 4.4% YTD) – November was the strongest month for the index since May 1995 – Bloomberg Global High Yield Index (hedged to USD) 1.3% (4.7% in November, 9.8% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index 1.3% (5.4% in November, 5.5% YTD).
Powell’s comments helped push the yield on the benchmark 10-year US Treasury note down -27 basis points (bp) to 4.20% from 4.47% (down -61bp in November, up 32bp YTD), nearly a three-month low. The 2-year Treasury yield decreased -41bp, down to 4.54% from 4.95% (down -41bp in November, up 11bp YTD).
European government bond yields broadly declined as lower-than-expected inflation data raised expectations that the ECB could start cutting interest rates next year. The yield on Germany’s 10-year bund decreased -28bp over the week, ending at 2.36% from 2.64% (down -36bp in November and -21bp YTD) and falling toward its lowest level in more than four months. The yield on the benchmark 10-year Italian bond declined toward 4%.
In the UK, bond yields bucked the broader trend, rising from midweek lows on hawkish comments from policymakers. Over the week, the 10-year gilt yield decreased -14bp, to 4.14% from 4.28% (down -34bp in November, up 47bp YTD).
Issuance was in line with weekly expectations in the US investment-grade corporate bond market. All issues were oversubscribed. The continued rates rally, and expectations that liquidity will become more challenging in mid- to late December supported the performance of high yield bonds.
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