CI Associates

Global Matters | Monthly

Market review & outlook January 2024

Markets began to consolidate in January and returns ended the month in a more mixed fashion, compared to the ‘(almost) everything rally’ seen in Q4 2023. Global developed and US equities both continued their momentum to reach all-time highs, returning 1.2% and 1.7% respectively. Equity markets in Asia continued to show limited signs of agreement, with Japan posting a 7.8% return, while further challenges in China impacted Emerging Asia, falling 5.2%. UK equities ended the month down 1% after some varied data prints, while European equities outperformed, returning 1.9%. After the bond market rally in December, markets took a step back with global bonds declining 1.3%, following a re-assessment of 2024 interest rate projections. Despite a shaky start, credit markets ended the month undisturbed with a slight 0.2% decline in investment grade. In commodities, a tumultuous month geopolitically, led to a 6.1% rise in oil.
After initial trepidation, some positive economic data and growing optimism for a soft-landing led US equities to make further progress, particularly during the middle of January. Gains were again somewhat concentrated among mega-cap tech stocks, with the Magnificent 7 rising 6.4%, before paring back some of the gains at the end of the month, finishing up 2.3%. In contrast, the equally weighted US equity index ended the month in negative territory (-0.8%). US growth stocks continued to outperform returning 2.6% compared to value, which returned 0.5%.
Following the highest two-month return since 1990 in November and December, bond markets experienced a mild setback, marked by a 1.7% decline in global government bonds. A concerted effort by the Fed to push back on markets’ seemingly excessive rate cut projections, pushed the US 30-year treasury yield 14 bps higher, while the 10-year yield increased 3 bps to 3.91% after some volatility. On the short end of the curve 2-year yields fell 4 bps to 4.21%. Alongside the more hawkish tone, some hotter than expected economic data prompted markets to make a significant revaluation of future interest rates. By month end futures markets had moved to price in 35% chance of a rate cut in March, as opposed to 84% at the turn of the year – an implicit tightening.
A similar narrative played out in the UK and Europe, with central bank members attempting to persuade markets that despite good progress, declaring victory over inflation would be premature. The upside surprise in UK inflation figures served as a timely reminder of this, with consumer prices rising 4% year-on-year in December, breaking the 10-month disinflationary trend. As a result, gilt yields rose across the maturity curve and UK government bonds returned -2.3% over the month. The ECB is still looking for further evidence of disinflationary momentum, however muted growth prospects may provide cause for an earlier move, after the Eurozone narrowly avoided a technical recession in Q4.
Fears of escalation in the Middle East conflict were raised as Houthi rebels targeted Red Sea shipping and the US and UK retaliated. Although shipping costs have risen sharply as a result, with cargoes redirected around the Cape, oil and energy prices avoided any dramatic price swings, in the face of ample supplies, with US production at or near record levels, high levels of gas in storage in Europe and concerns about weak global demand (especially China). The bigger risk is that Iran and the US are drawn into direct conflict, an outcome neither side wishes, but which cannot be dismissed.