Global Stock Markets: Breaking a Winning Streak Amid Economic Reassessment

The first week of January 2024 brought a notable shift in global financial markets, ending a nine-week winning streak for global equities. This shift was influenced by a combination of factors, including changing expectations about Federal Reserve interest rate policies and a strong U.S. labor market.

In Asia, the ripple effects were evident as key stock indices like MSCI’s broadest index of Asia-Pacific shares outside Japan and Hong Kong’s Hang Seng Index recorded declines. The MSCI world index was relatively flat but was heading towards a 1.78% decline for the week. These movements reflected a broader sense of recalibration in global markets, particularly after a period of bullish behavior in December​​.

Lewis Grant, a senior portfolio manager at Federated Hermes Limited, noted that the weak opening to equity markets in 2024 suggested investor caution after the previous month’s exuberance. This cautious approach was driven by macroeconomic sensitivity and uncertainty about the first economic releases of the year. The resilience of the U.S. labor market, evidenced by recent data, indicated less urgency for the Fed to ease its policy stance rapidly. Richmond Fed President Thomas Barkin’s recent comments also pointed towards a more balanced approach to rate hikes and inflation control by the Fed​​.

Wall Street’s performance mirrored these sentiments, with the S&P 500 experiencing its first weekly decline since late October. The pan-European STOXX 50 futures and the U.K. FTSE futures also faced declines. Japan’s Nikkei index, however, showed some resilience, benefiting from the yen’s slide against a strengthening dollar​​.

The yen’s weakness was further influenced by a New Year’s Day earthquake in Japan, which led to diminished expectations for a hawkish shift in the Bank of Japan’s policy. This development, coupled with the Fed’s pushback against aggressive rate-cut expectations, contributed to the dollar’s rise against the yen, highlighting the impact of interest rate differentials on currency movements​​.

In the broader currency market, the U.S. dollar index, which measures the currency against a basket of major peers, including the yen, saw a week-on-week increase of 1.22%. Concurrently, the 10-year Treasury yield in the U.S. rose significantly, reflecting the market’s reassessment of the economic landscape and monetary policy expectations​​.