Markets crumble and then start to bounce back. The TPP weekend wrap.

The FTSE 100 records its worst week this year:

Britain's FTSE 100 touched monthly lows on Friday and logged its sharpest drop since October 2023 in a week filled with a raft of central bank policy decisions.

The UK benchmark closed the week out 2.6% lower but at one point on Friday was down around 3.5%, wiping out roughly half of its gains on the year. The underperforming index seems to react to international pressures more than most due to a lack of willing investment into UK equities propping it up. The recent budget by the new labour government has unfortunately reversed the year's early optimism in the market.

During the week the Bank of England left its key interest rate unchanged at 4.75%, as expected. However, three of the nine members of the Monetary Policy Committee voted for a quarter of a percentage point reduction due to sluggish demand and a weaker labour market. Even so, the majority judged that recent increases in wages and prices had “added to the risk of inflation persistence.”

Governor Andrew Bailey said: “We think a gradual approach to future interest rate cuts remains right.” He added that, with the heightened uncertainty in the economy, “we can’t commit to when or by how much we will cut rates in the coming year.”

This is fairly standard communication from a central bank that will simply have to react to data as it comes through. Inflation is down, but not quite enough to really justify heavy cuts. The recent budget will be inflationary which won’t help, but it is also likely to increase unemployment which might make them loosen policy more quickly if the economy also shows more signs of weakness.

Headline annual inflation accelerated as expected in November to 2.6% from 2.3% in October due to higher gasoline and clothing costs, although the month over month figure (the actual monthly change from the month before) was only up 0.1% which is bang on target and would allow for cuts if it continues.

Underlying price pressures remained strong. Average weekly earnings, excluding bonuses, climbed 5.2% in the three months through October, exceeding a consensus forecast for 5%.

UK retail sales fell short of expectations, while government borrowing figures came in stronger than anticipated. Retail sales edged up by 0.2% in November, improving from October’s 0.7% decline but missing forecasts of a 0.5% increase.

Growth in supermarkets and non-food stores partially offset a slump in clothing sales, according to the Office for National Statistics. “Retail sales increased slightly in November following last month’s fall,” said Hannah Finselbach, senior statistician at the ONS.

“For the first time in three months there was a boost for food store sales, particularly supermarkets. It was also a good month for household goods retailers, most notably furniture shops. Clothing store sales dipped sharply once again, as retailers reported tough trading conditions.”

Meanwhile, public sector borrowing was £11.2bn for the month, below the £13bn consensus estimate and marking the lowest November figure in three years.

“Borrowing this month was over £3bn less than this time last year and the lowest November borrowing for three years,” noted Jessica Barnaby, deputy director for public sector finance at the ONS. “Central government tax receipts grew compared with last year, while increased spending on public services and on benefits were offset by lower debt interest payable.”

Europe

European stocks posted the biggest weekly decline in over three months.

The STOXX Europe 600 Index ended 2.76% lower, its biggest weekly loss in more than three months. Major national stock indexes also fell with Germany’s DAX dropping 2.55%, Italy’s FTSE MIB plummeting 3.22% and France’s CAC 40 Index falling 1.82%.

The huge Danish drugmaker Novo Nordisk sank 21% after a study showed underwhelming results from its obesity drug trial. The company sank to its lowest since August 2023 as its experimental obesity shot CagriSema helped patients lose an average of 20.4% of their weight over 68 weeks, short of the 25% weight loss that Novo had repeatedly predicted.

Novo is Europe’s biggest company by market capitalization and the second-heaviest weighted member in the Stoxx 600.

The OMX Copenhagen 25 Index slid 2.9%, also hurt by a decline in Zealand Pharma after it said the US Food and Drug Administration failed to approve its new drug application for glepaglutide for treating short bowel syndrome.

The benchmark Stoxx 600 is now up less than 5% in 2024, sharply underperforming US peers but still outperforming the FTSE 100 and the CAC 40 which is now down -3.56% on the year. However, this is still not the worst-performing index in Europe this year - the Latvian market has fallen -35.46% and Luxembourg’s by -15.82%.

Activity in the eurozone’s private sector ended the year still in contraction, although a rebound in the services sector ensured that the overall decline was marginal, purchasing managers’ surveys by S&P Global showed. The slowdown in business activity in the bloc’s largest economies, Germany and France, eased only slightly.

The U.S.

U.S. stocks declined during the week, although a rally on Friday helped major indexes recover some of their lost ground. Losses were broad-based, though smaller-cap indexes generally fared worst. The lift on Friday ended the run of 14 consecutive trading sessions with more decliners than gainers in the S&P 500 Index, the longest streak since 1978, which seemed to add some concern regarding the durability of the recent run for major indexes.

The event dominating sentiment during the week was the Fed’s rate announcement following its highly anticipated policy meeting that concluded Wednesday. As was largely expected, policymakers announced a quarter point, 0.25%, cut to the Fed’s policy rate following the meeting, bringing the total reduction in rates to 100 basis points (1%) since the start of the rate-cutting cycle in September.

While the cut was in line with what many were anticipating, sentiment turned negative on Wednesday afternoon as investors digested forecasts and commentary from Fed officials regarding the path forward for interest rates. Speaking at a press conference following the meeting, Fed Chair Jerome Powell noted that policymakers’ forecasts for core inflation in 2025 rose to 2.5% from 2.2% in September. Powell said that the central bank is “going to be cautious about further cuts,” with most Fed officials now expecting two rate cuts in 2025, down from four in September. The hawkish tone helped drive the S&P 500 Index lower by nearly 3% for the day, its second-worst day of the year.

Political uncertainty in the form of a looming government shutdown also seemed to rattle investor confidence. Several attempts at passing legislation to allow continued spending on government operations failed during the week, including a proposal backed by President-elect Donald Trump that was rejected Thursday evening. An agreement had not yet been reached as of Friday afternoon.

In economic news, the Commerce Department reported Thursday that the U.S. economy grew at an annualized rate of 3.1% in the third quarter, outpacing a previous estimate of 2.8%, partially owing to increases in consumer spending.

Asia

Japan’s stock markets fell over the week, with the Nikkei 225 Index losing 2.0% and the broader TOPIX Index down 1.6%. Banks faced a headwind on a slight increase in expectations that the pace of monetary policy normalization by the Bank of Japan could be slower than had been anticipated.

The yield on the 10-year Japanese government bond was broadly unchanged during the week at 1.05%. A sell-off in the yen supported the profit outlook for Japan’s exporters, notably automakers. The yen weakened to within the high-JPY 156 against the USD range, from about 153.7 at the end of the prior week. This prompted fresh verbal intervention by Japanese authorities to prop up the yen.

The BoJ kept its policy rate steady at around 0.25% at its December 18–19 meeting, with investors reading BoJ Governor Kazuo Ueda’s post-meeting comments as dovish. Market expectations had been converging around the greater likelihood of a hike in January.

Japan’s nationwide core CPI rose 2.7% year on year in November, ahead of consensus expectations for a 2.6% increase and up from 2.3% in October.

Chinese equities retreated as disappointing data raised concerns about the economy. The Shanghai Composite Index declined 0.7%, while the blue-chip CSI 300 lost 0.14%. In Hong Kong, the benchmark Hang Seng Index fell 1.25%, according to FactSet.

November activity data pointed to the uneven nature of China’s recovery amid a looming trade war with the U.S. Retail sales expanded a below-consensus 3% from a year ago, down from October’s 4.8% rise and highlighting Chinese consumers’ unwillingness to spend. Fixed asset investment grew 3.3% in the January to November period, lagging forecasts, and less than the 3.4% increase in the calendar year to October. Property investment in the period fell 10.4%. Industrial production was a bright spot, rising a better-than-expected 5.4% from a year earlier amid demand for robots, passenger cars, and solar panels.

New home prices in 70 cities fell 0.1% in November, slowing from October’s 0.5% drop, according to the National Bureau of Statistics. While November’s dip marked the 17th monthly decline, it was the slowest pace since June last year, according to Reuters. China’s property market has shown signs of stabilizing after Beijing unveiled a sweeping package in late September aimed at reviving the crisis-hit sector. Analysts anticipate that the government will ramp up efforts to stimulate growth as China’s economy faces higher tariffs and other challenges under the incoming Trump administration.

Action On Our Platform

Although the week was incredibly volatile, and in the main negative (particularly in the FTSE) as the dust settles on the week we think our strategies have traded it well.

Our trackers have obviously struggled this week as is the nature with a 'buy and hold' investment.

However, both our long or flats and active strategies took advantage of the market drop and then the volatility. Let me explain.

Our LoF's aim to miss as many market dips as they can on a quarter by quarter basis. As the FTSE, CAC, DAX, and the US dropped severely on Wednesday, many of these LoF's moved into the market.

Markets dropped more than expected on the back of the Federal Reserve meeting, and although we'll rarely time the exact bottom of any move, most of these strategies have missed a 1.5-2.5% movement, so when the markets move back up, they'll be very well placed.

Meanwhile, our active strategies were very active this week. As an average across the strategies they started the week with a slight sell bias. They were buying the FTSE, the CAC, the Dow and the Russell 2000, but had quite a large short sell position against US tech, namely the Nasdaq and the S&P500.

As markets crumbled on Wednesday, many of the short sells were liquidated as the drop continued into the post market action, and a few added to their BUY exposure. Quite the change.

This means coming into the weekend, as a platform we're very much on the BUY side after buying the dip.

If markets bounce back from here, ALL of our strategies should be well placed to take advantage.

Here is hoping that we end 2024 on a high before a blistering 2025.

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The Week Ahead

Merry Christmas. The week ahead will be quite with trading holidays on both Wednesday and Thursday and a shortened trading day for Christmas Eve on Tuesday.

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