Interest rate optimism supports equity and bond markets

The positive trend on the international equity and bond markets continued in December, albeit not quite as briskly as in the previous month. Market participants expected interest rate cuts against the backdrop of falling inflation data. The US Federal Reserve held out the prospect of this for 2024.

The German share index DAX rose to over 17,000 points for the first time, reaching an interim all-time high and advancing by 3.31%. The broad European stock market was somewhat stronger, rising by 3.77% as measured by the Stoxx Europe 600. In the USA, the S&P 500 Index rose by 2.78%, while Hong Kong's Hang Seng Index fell by -1.55%. Global equities, as measured by the MSCI World, rose by 3.17% - all index figures in euro terms.

Driven by continued interest rate optimism, investors were confident that the interest rate plateau had been reached, as in the previous month of November. On the bond markets, investors expected key interest rates to fall. Yield levels continued to fall accordingly - in some cases sharply: the yield on 10-year German government bonds fell by over 40 basis points to 2.02%, as did their US counterparts, and to 3.88% in the USA. High-quality corporate bonds yielded more than 50 basis points lower on both sides of the Atlantic (Europe: 3.56%; USA: 5.06%) than in November. Yields on high-yield corporate bonds fell the most, in Europe by almost 90 basis points to 7.08% and in the USA by 84 basis points to 7.60%. The risk premiums for corporate bonds narrowed further as a result, and the bond markets performed positively across the board in the face of these declining yields.

In an environment of falling interest rates, the price of a troy ounce of gold rose from USD 2,036.41 to USD 2,062.98. In the middle of the month, the Chairman of the US Federal Reserve, Jerome Powell, confirmed market expectations and expressed his satisfaction with the inflation trend: In the US, the inflation rate fell to 3.1% in November compared to the same month last year (October: 3.2%). Although the Fed Chairman did not specify a date, he held out the prospect of three interest rate cuts in 2024 to a range of 4.50% to 4.75% by the end of the year. The interest rate cuts would facilitate a so-called soft landing for the US economy. The communication also shows the Fed's changed priorities: the goals of inflation and full employment are now being given the same importance again. Most recently, the focus was clearly on combating inflation.

Market participants in the eurozone are also expecting key interest rates to fall, in some cases as early as March and in others by up to 150 basis points by the end of 2024. ECB President Christine Lagarde tried to curb this euphoria at the ECB meeting in December. In November, the inflation rate in the eurozone was 2.4% (October: 2.9%) compared to the same month of the previous year, which would give the ECB room to cut interest rates. However, it is likely that government measures - in Germany, for example, the abolition of the energy price brake and the increase in the CO2 tax - and higher wage pressure will probably cause inflation to stabilise at 3% rather than 2%. Nevertheless, weak economic data and falling inflation also argue in favour of lowering key interest rates in the eurozone: the purchasing managers' indices for manufacturing and services remained below the threshold of 50 in December, above which an expanding economy can be expected. The ECB could therefore cut key interest rates in several steps by up to 100 basis points to 3.50% from mid-2024.

The Asian stock markets performed well for the most part in December and were able to regain ground. This was fuelled by optimistic investor sentiment in the US and Europe on the one hand, while several countries, including Japan, benefited from "friend shoring" on the other. There were also hopes that China would adopt a more growth-friendly course. In December, the country's Central Economic Conference shifted its focus from the key theme of "security" to "progress" and held out the prospect of supporting growth more strongly with the help of financial policy. However, it remains to be seen whether this will result in major incentives, as debt reduction is also to be continued. China is also likely to pursue its growth target of 5% in 2024, which is significantly more ambitious than in the previous year, as the starting point in 2022 was low due to the consequences of the coronavirus pandemic.

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