Federal Reserve Spoils The Party On Rates As Markets Retreat
EQUITY MARKETS
Markets were mostly in the red as the Federal Reserve’s view of a slowing rate-cutting cycle discouraged investors from bidding further in stock markets. The downside was most pronounced for U.S. equities, while European equity markets drew interest. The S&P 500 posted a negative return of -2.39%, whereas the Euro Stoxx 50 recorded a positive return of 1.95%.
December saw a reversal in the small- to mid-cap trade, with the Russell 2000 and the S&P 400 Mid-Cap Index reversing the previous month’s performance. The Federal Reserve announced a 25 basis points (bps) rate cut, with a view that the pace of rate cuts would slow due to Trump’s economic policies, which are expected to exert further inflationary pressures in an already inflation-sticky environment. Smaller to mid-cap companies, considered more rate-sensitive due to their higher cost of capital, faced challenges in achieving required returns on capital when accounting for inherent business risks. Amid this, the Nasdaq Index bucked the trend relative to other U.S. indices, delivering a monthly return of 0.56%.
France’s CAC 40 halted its slide for the month, delivering a positive return of 2.14%, although it ended 2024 with significant underperformance relative to other European peers at 0.92%. Japan’s Nikkei 225 was the best-performing equity market, posting a return of 4.52% for the month. This strong performance was bolstered by Governor Ueda’s decision to delay a potential rate hike, which reinstated the yearly equity market uptrend, coupled with a weakening Yen that further supported the market.
Stellantis has reported a significant production decline, with output falling by approximately 40% in 2024 compared to the previous year. The company is not alone in facing mounting pressure from Chinese competition. Meanwhile, the search for a new CEO continues. The drop in demand for European automakers has fuelled calls for the European Union to reconsider its planned combustion engine ban by 2035, with some advocating for the deadline to be pushed back further to protect the industry. In another development, Nippon Steel’s proposed acquisition of US Steel was blocked by U.S. President Joe Biden in what is widely seen as a protectionist move to safeguard American jobs. Meanwhile, Eni SpA announced plans to deploy a supercomputer designed to enhance its exploration of new oil and gas sources. Costing €100 million and powered by 14,000 AMD chips, the system will enable the company to better exploit global opportunities. Tesla, for the first time since 2011, reported a decline in delivery growth, with total deliveries reaching 1.79 million vehicles in 2024, down from 1.81 million in 2023. The intensifying competition from Chinese manufacturers has sparked a power struggle in the electric vehicle (EV) industry, creating ripple effects throughout the broader automotive sector.
SECTOR PERFORMANCE
Sectors within the S&P 500 showed mixed performance. Economically sensitive areas such as materials, energy, and real estate faced steep losses exceeding 8%, while industrials and utilities also contracted, reflecting broader market pressures. Defensive sectors like healthcare and consumer staples demonstrated relative stability with moderate declines. On the other hand, growth-oriented sectors such as information technology and consumer discretionary showed resilience, recording gains. The standout performer was Communication Services, which posted a monthly return of 3.58%.
In Europe, sector performance was similarly varied. The real estate sector experienced the largest decline, followed by communication services and energy, which also incurred moderate losses. Utilities and materials showed slight declines, indicating some resilience compared to more underperforming areas. However, consumer staples, industrials, healthcare, and financials managed modest gains, demonstrating their relative stability in challenging conditions. Growth-focused sectors, including information technology and consumer discretionary, outperformed with notable gains, likely driven by robust demand and favourable sector-specific trends, pointing to areas of strength within the broader market.
CENTRAL BANKING AND GEO-POLITICS
Central banking has been in full swing during the month of December with two major rate cuts by the Federal Reserve and the European Central Bank. Both Central Banks have cut rates by 25bps but with divergent takeaways from their communication. Whilst the Federal Reserve carried out a hawkish cut, the European Central Bank was seemingly more negative on the path to the Euro Area’s economic region. The Federal Reserve revised its core PCE expectations upwards as Trump’s economic policies are expected to impact economic momentum which should maintain the high price levels experienced currently in the economy. On the other hand, the European Central Bank cut 25bps in rates in an economy that is continuously weakening with no upside catalyst on the fiscal front. Any worsening in the ongoing war between Russia and Ukraine can be detrimental to its inflation target given the vulnerability that exists in the energy market for the European region. Projections by the ECB for 2024 and 2025 headline inflation stand at 2.4 per cent and 2.1 per cent respectively. Sticky inflation has featured post-2022 crisis which manifested itself in core inflation. ECB projections stand at 2.90 per cent in 2024 and 2.3 per cent in 2025. In a downbeat tone, the ECB downgraded economic growth from its September projections to 0.7 per cent in 2024 and 1.1 per cent in 2025. The Swiss National Bank cut rates by 50bps to push back against the strong Swiss Franc which has attracted interest from investors hedging their risk exposures.
COMMODITIES
The oil and LNG markets are under heightened scrutiny as Donald Trump assumes the U.S. presidency. Trump has already signalled intentions to compel Europe to make large-scale purchases of U.S. oil and gas, threatening tariffs if these demands are not met. European Commission President Ursula von der Leyen has expressed a willingness to increase trade in American LNG to avoid potential tariffs. The U.S. currently supplies approximately 48% of the European Union’s LNG imports, underscoring its significant role in the bloc’s energy mix.
Crude oil prices rose in December, with WTI Crude Oil futures gaining about 5.50% to close the year at $71.72, while Brent Crude prices increased by 3.90%, finishing at $74.64. In the U.S., LNG futures surged by 8% during the month, driven mostly by colder weather and reduced seaborne imports, which increased reliance on domestic gas storage. The European Union’s LNG storage levels dropped to 75%, down from 90% in the same period last year, due to colder weather in the region. LNG trade has become increasingly politicized, with Trump pressuring the EU to boost imports of American LNG, raising concerns about the geopolitical dynamics of energy markets.
CURRENCIES
The U.S. Dollar continued its strong upward momentum against major currencies, bolstered by the Federal Reserve’s “higher-for-longer” stance communicated at the end of the month. The Federal Open Market Committee (FOMC) highlighted that U.S. economic activity remains solid, with a supportive but gradually slowing labour market. Factoring in potential impacts of Trump’s economic policies, the Fed’s median projection for core inflation shows inflation staying above target through 2024. Core PCE inflation projections for 2025 were revised upward from 2.2% to 2.5%, suggesting that rate cuts in 2025 will likely be limited to 50 basis points—far lower than market expectations. This outlook reinforced the appeal of the U.S. Dollar as investors increased their holdings.
The Japanese Yen faced significant pressure, declining by approximately 5% against the U.S. Dollar for the month. This decline was attributed largely to the growing monetary policy divergence between the Bank of Japan (BOJ) and the Federal Reserve. BOJ Governor Ueda also raised concerns about the potential inflationary effects of Trump’s policies and their broader implications for financial markets. Until monetary policy aligns more closely between the two regions, the Yen is expected to remain weak relative to the Dollar. Against the Euro, the Yen’s depreciation was less pronounced, with a decline of 2.7%, reflecting milder pressure from European monetary dynamics.
OVERALL
In conclusion, December was marked by significant developments across financial markets, central banking, and geopolitics. Equity markets faced notable challenges, particularly in the U.S., as the Federal Reserve’s hawkish stance on rate cuts dampened investor sentiment. European and Japanese markets showed pockets of resilience, with Japan’s Nikkei 225 emerging as a standout performer. Meanwhile, sector performance revealed a divergence, with defensive and growth-oriented sectors demonstrating relative stability and gains, respectively, while economically sensitive sectors suffered steep losses. Central banks remained pivotal players, with rate cuts by the Federal Reserve, European Central Bank, and Swiss National Bank reflecting divergent economic outlooks. The Fed maintained a cautious approach amid inflationary pressures linked to U.S. policy shifts, while the ECB signalled weaker growth prospects for the Eurozone. In the commodities space, oil and LNG markets became increasingly politicized as the U.S. pressed Europe to increase energy imports, driving concerns over energy security and trade dynamics. Rising crude oil and LNG prices underscored the impact of colder weather and geopolitical tensions.
