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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Investors were in a rather bullish mood last year. The buzz over generative AI and high expectations for company earnings helped stock prices soar. The belief in a “soft landing” scenario for the global economy, where inflation falls without triggering a significant slowdown, entered the mainstream. Traders also started to price in more interest rate cuts than central bankers were signalling, which meant that even bonds made a comeback. This year, all the optimism will be put to the test.
After nine consecutive weeks of gains, America’s leading stock index, the S&P 500, has started the new year oscillating somewhat sideways. Solid jobs data and a sturdier than expected December inflation reading dimmed hopes for sooner and steeper rate cuts. But then weak producer price data on Friday reversed the mood again. Global equities and bonds have been treading water for the past two weeks too.
Twists and turns will be a feature of financial markets in 2024. Traders have positioned themselves for rosy outcomes, but the economic outlook is fogged by uncertainty and several pivotal geopolitical events. As the reality unfolds, investors will have to constantly recalibrate.
The shift to rate cuts will take centre stage. Although inflation has fallen faster than anticipated, policymakers have tried to push back against the aggressive cuts implied by futures markets. European Central Bank board members warned midweek that the pace of disinflation will probably slow in 2024. But the lagged effect of high rates will also be increasingly felt by households, businesses and labour markets.
By the second half of the year the appropriate rate path should be clearer. Until then, any let-up in volatility will require the gap between investor and central bank expectations for interest rates to shrink. Meanwhile, any effort by the Fed to end its balance sheet wind-down should support US Treasuries, but navigating the fuzzy line between an “ample” and “abundant” amount of liquidity will keep markets skittish.
Beyond central banking, the record-breaking year for elections will have a significant market impact. More than 2bn people across over 50 countries will go to the polls. Pre-election borrowing promises will take on greater importance with investors already troubled by hefty fiscal deficits and high public debt. With debt issuance already soaring, a bond market backlash is a risk.
Elections, including in the US and Taiwan — which takes place on Saturday — could have significant global ramifications. A second Donald Trump presidency could be far more dangerous than the last. Polls and campaign debates will keep traders on edge. And, although markets took the Israel-Hamas conflict in their stride, the risk of a regional conflict in the Middle East has mounted. In the Red Sea, attacks by Houthi rebels on ships and counterstrikes this week by the US and UK have raised oil price volatility. The longer the disruption persists, the more harmful it will be for global supply chains.
Adding to the jitters will be corporate news, particularly in the technology sector. Last year’s scramble for stocks linked to generative AI has raised concerns over lofty valuations and market concentration. The “Magnificent Seven” tech stocks now account for almost a fifth of the global MSCI index. This year, the increasing adoption and commercialisation of large language models will highlight whether the upbeat bets for AI productivity gains are actually backed by the evidence. More discerning investors could lead to choppier equity markets.
Markets have a habit of entering election years in a vacillating pattern, only to end on a strong note. Lower interest rates, a resilient global economy and ongoing AI enthusiasm could all provide upward momentum. But even if stock and bond prices eventually end 2024 higher than where they started, the journey there will be a bumpy one.