By Naomi Rovnick, Dhara Ranasinghe and Rodrigo Campos
LONDON (Reuters) – Markets that began the year with investors expecting a rally in global stocks to fizzle out, rapid U.S. interest rate cuts to boost Treasuries and weaken the dollar and strengthening U.S. Emerging market currencies have firmly challenged that consensus.
Global stocks are headed for a second straight annual gain of more than 17%, unfazed by wars in the Middle East and Ukraine, Germany’s economic contraction and government collapse, French budget chaos and China’s slowdown.
This is mainly due to a second year of huge gains for Wall Street stocks, as artificial intelligence fever and strong economic growth sucked more global capital into US assets and sent the dollar up 7% against its peers in 2024.
American exuberance surged after Donald Trump’s Nov. 5 election victory, as traders focused on the president-elect’s plans for tax cuts and deregulation, and the rise of animal spirits propelled the cryptocurrency bitcoin to a gain. 128% annually.
Global markets enter 2025 increasingly exposed to U.S. trends, a risk factor that came to life after the Federal Reserve rattled markets this month by signaling fewer rate cuts in the coming year.
This came after weak U.S. jobs data and a surprise rate hike in Japan in the middle of the year that put pressure on dollar-denominated assets and sent a ball of volatility through global markets and sparked a short-lived run on August.
Meanwhile, debt investors are increasingly concerned that Trump’s proposed trade tariffs will stoke inflation and fear excessive White House borrowing that could roil the $28 trillion Treasury bond market and cause a broader disruption in government bonds.
“It’s going to be difficult, in the event of a (U.S.) withdrawal, to find a place to hide,” said Barclays private bank chief market strategist Julien Lafargue.
WALL STREET JUGGERNAUTES
Wall Street’s S&P 500 stock index is up 24% this year after a similar jump last year, its strongest two-year streak since 1998.
Shares of AI chip maker Nvidia are up 172% in 2024, Elon Musk’s automaker Tesla gained 69% while investor exposure to US stocks hit record levels in December.
The combined value of the so-called Magnificent Seven US technology stocks represents about a fifth of the MSCI world stock index, according to Schroders, raising the market’s threat levels if their earnings or AI technology disappoint.
THE STRUGGLES OF EUROPE
The euro has fallen about 5.5% against the dollar this year, while European stocks have performed worse relative to their U.S. peers than in at least 25 years.
After four rate cuts by the European Central Bank, the euro zone economy is falling more slowly and some forecasters predict Europe will recover in 2025.
The chances of any international market recovering if the United States falters are often slim. Gold gained 27% in 2024 as investors scrambled to find other diversification trades.
POWERFUL DOLLAR
US tariff fears and a strong dollar have hit emerging market currencies particularly hard, exacerbating losses for struggling nations.
Currencies in Egypt and Nigeria fell about 40% against the dollar following devaluations, and the Brazilian real weakened more than 20% as concerns about public debt and spending intensified.
A scattered set of slight annual gains included a 2% rise for the Malaysian ringgit. Among the best performers, the South African rand, the Hong Kong dollar and the Israeli shekel were virtually unchanged over the year.
“We remain cautious on emerging market currencies, and the main reason behind this is Trump’s trade war,” said Arif Joshi, co-head of emerging market debt at Lazard Asset Management.
CHINESE ROLLER COASTER
Chinese stocks had a wild year, rising nearly 16% in a single week in September after Beijing signaled its willingness to stimulate the ailing economy, with a series of deep weekly declines since then.
Investors who held China in 2024 were rewarded with a 14.5% annual gain, but many expect the short-term boom-bust cycle to continue, roiling markets in Europe and Asia, until Beijing takes direct action. .
THE HURT BOND BULLS
Interest rates fell in major economies this year, but bond investors suffered annual losses after spending much of 2024 pricing in more monetary easing than central banks ultimately implemented, as inflation remained stiffer than expected. expected.
US 10-year Treasury yields rose about 60 basis points in 2024, British 10-year bond yields rose 100 bps, and German 10-year yields added 16 bps.
In Japan, where interest rates have risen twice this year as inflation accelerated, the 10-year bond yield added 45 basis points in its biggest annual jump since 2003.
The coming year looks challenging for bond markets, which are unsure how Trump’s policies will influence the US Federal Reserve. The French debt turmoil last month also signaled that so-called bond vigilantes are ready to punish governments for excessive borrowing.
SURPRISE WINNERS
Bond investors’ wins in 2024 came from some of the riskiest markets.
Lebanon’s defaulted dollar bonds recovered around 100% during the year, as investors anticipated that the conflict in the Middle East would weaken the armed group Hezbollah.
An ambitious reform program and the prospect of Trump’s return to the White House prompted a 100% return on dollar bonds issued by Argentina, whose leader Javier Milei has close ties to the US president-elect. Buoyed by bets that Trump could end the Russian invasion of Ukraine, Ukrainian bonds returned more than 60%.
(Reporting by Naomi Rovnick and Dhara Ranasinghe in London and Rodrigo Campos in New York, additional reporting by Libby George; Editing by Hugh Lawson)
