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Ok. Got itAfter volatile trading sessions the prior month, pressure eased on energy prices.
A tide that lifts all boats
Global equity and bond markets rallied over the month as risk sentiment improved. Numerous fault lines were largely overshadowed by markets embracing the increased probability that the interest rate cutting cycle across the developed markets will commence in 2024. Cooling US labour market trends, combined with less hawkish statements from US policy makers set the scene for an easing of bond yields. What really propelled momentum, however, were downward surprises in inflation data from several countries over the month, which provided the catalyst for market pricing of earlier and potentially deeper interest rate cuts in the year to come.
After volatile trading sessions the prior month, pressure eased on energy prices. The ceasefire in the Middle East, increased US supply and weak factory data from China drove the oil price lower by 5,2% in November, while European gas prices also decreased by 14,5%. Following a deferment of the meeting, the OPEC+ members reconvened in late November and agreed to additional voluntary cuts in oil production in 2024. The cuts are intended to culminate in a total reduction of 2 million barrels a day, but unusually, the individual members will announce the respective voluntary cuts in due course.
Lower domestic food prices saw Chinese inflation figures move back into deflation, with headline CPI printing at -0,2% y-o-y. Inflation rates declined across European countries, with Eurozone headline inflation for October moderating to 2,9% y-o-y from 4,3%, supported by lower energy costs. At the end of month, the November initial CPI print for the region was released at an even lower 2,4% y-o-y, lower than expected. Similarly, inflation in the UK took a meaningful dip on the back of easing energy prices over the year, even if monthly data was unchanged over the month.
US unemployment recorded at a higher 3,9%, while wage growth slowed to 4,1% y-o-y from 4,3% the previous month. US headline inflation moderated to 3,2% y-o-y in October, against a backdrop of lower energy prices and higher food prices, while core inflation declined to 4,0%.
Producer prices also slowed to 1,3% from 2,2% the prior month. Data for the US personal consumption expenditure price index (PCE) was recorded at 3,0% (from 3,4% the previous month), with the annual rate for core PCE (the Fed’s preferred measure of inflation) slowing to 3,5%. Inflation expectations also moderated in tandem with recent data releases. In line with expectations, the US Federal Reserve (US Fed) kept interest rates on hold. Similarly, the Bank of England (BoE) held steady, although three out of nine voting members still preferred a 25bps interest rate hike.
Gains were seen across asset classes as the tide of declining bond yields lifted all boats. The closely monitored market volatility gauge, the CBOE Volatility Index (VIX), declined over the month to reach a four year low. The S&P 500 gained 9,1% over the month, with even greater gains from the technology heavy Nasdaq 100 index, several European bourses and Japanese equity markets. Despite further support from policy makers, domestic Chinese equity markets ended the month flat. The Hang Seng Index returned 0,0%, while the MSCI Emerging Markets index gained 8,0%.
After reaching cycle highs the prior month, global bond yields declined meaningfully in November. The Bloomberg Global Aggregate Bond index gained a hefty 5,0% in November, bringing the return year to date back into the green at 1,5%. The US 10-year bond yield pivoted and trended down to 4,4% in November, despite a change from Moody’s in the outlook for the country’s credit rating to negative, as markets asserted their view that the US Fed has reached the peak of the interest rate cycle with cuts only a matter of time. Against this backdrop, gold remained well supported, while the US dollar waned. Most of the major currencies gained against a weaker US dollar which depreciated by 3,0% over the month on a trade weighted basis. Traders are now pricing more meaningful interest rate cuts, earlier in the year. Time will tell whether this is premature or ambitious, but in the meantime, talks of a soft landing is on the cards again. What is more certain, is that the balancing act for policy makers remains tight.
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Nedgroup Private Wealth (Pty) Ltd and its subsidiaries (Nedbank Private Wealth) issued this communication. Nedgroup Private Wealth is a subsidiary of Nedbank Group Limited, the holding company of Nedbank Limited. ‘Subsidiary’ and ‘holding company’ have the same meanings as in the Companies Act, 71 of 2008, and include foreign entities registered in terms of the act. There is an inherent risk in investing in any financial product. The information in this communication, including opinions, calculations, projections, monetary values and interest rates, are guidelines or estimations and for illustration purposes only. Nedbank Private Wealth is not offering or inviting anyone to conclude transactions and has no obligation to update the information in this communication. While every effort has been made to ensure the accuracy of the information, Nedbank Private Wealth and its employees, directors and agents accept no liability, whether direct, indirect or consequential, arising from any reliance on this information or from any action taken or transaction concluded as a result. Subsequent transactions are subject to the relevant terms and conditions, and all risks, including tax risk, lie with you. Nedbank Private Wealth recommends that, before concluding transactions, you obtain tax, accounting, financial and legal advice. Nedbank Private Wealth includes the following entities:
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