Investment environment overview 12/2024

After a stellar year, markets closed 2024 on a sour note, as pullback in technology stocks and global political turmoil worsened the effect of central banks’ tempered outlook on future interest rate cuts. The S&P 500 has finished 2024 with a yearly gain of 23.3%, the STOXX 600 was up 5.9% YoY and the Chinese CSI 300 added 14.7% for the period. Monthly returns were less rosy – the Russell 2000 index plunged 8.3% in December, marking its worst monthly performance since September 2022, the S&P 500 decreased by 2.5%, the Dow Jones was down 5.3%, while the Nasdaq-100 gained 0.4%. European stocks behaved similarly – STOXX 600 lost 0.5% for the month, while German DAX was down 1.4%. Crypto assets also experienced a correction in December, but have largely rebounded, with Bitcoin recovering from a 15% drop, currently trading near BTC/USD 100,000. Fed reduced its base rates by 25 bps to a range of 4.25–4.50% during December meeting, but is expected to keep rates steady in January, citing continuing worries that loose financial conditions and inflationary risks from Trump’s proposed policies could put a pressure on prices. ECB too lowered its main rates by 25 bps, as bankers remain focused on inflation and are also likely to approach further rate reduction cautiously, while at the same time keeping an eye on weak (and worsening) EU economic data.

Red hats and green bills

Trump’s proposed MAGAnomics strategy aims for a sustained 3% annual GDP growth, but has been dismissed as unrealistic due to major structural challenges, such as an aging workforce, low productivity, and declining labor force participation. 220 analysts across the U.S. and Europe have participated in a Booth School of Business survey assessing the potential effects of new economic policies of the president elect. Among economists focusing on the U.S., over half predict “some negative effect” on the economy due to Trump’s potential policies, and 10% predict “large negative effects”. Proposed tariffs, including a 60% increase on China and 10%-20% on other nations, are the most critical concern. Eurozone analysts expressed fears about ripple effects on European economies, with 13% predicting “significant negative impacts” from Trump’s policies and 72% expecting “some negative effects”, with main concerns being potential tariffs that could further weaken manufacturing and the overall fragile state of the economy. 

Meanwhile, Goldman Sachs estimated that every 1 percentage point increase in tariffs could reduce U.S. GDP by 0.03-0.10% through direct and indirect effects, including lower consumer spending, supply chain disruptions, potential for trade wars and weakened business sentiment. Analysts noted similar patterns during earlier tariff hikes in 2018 and 2019, mentioning cumulative effects of such policies could disrupt long-term growth, despite expected short-term gains from deregulation and tax cuts.

European and US equity markets

Source: Bloomberg and Signet Bank

Economies remain fragile, services stay resilient

U.S. and Eurozone economic data remains precarious, showing little indication of a stable recovery. Manufacturing PMIs in the Eurozone continue to stay under the 50.0 level for most countries, with Spain showing the best results (53.3 for December), fueled by strong export demand from Europe and North Africa. In all, Eurozone manufacturing marked the 16^th consecutive month of contraction in December. Meanwhile, the services sector continues to show resilience, with services PMI remaining over the 50.0 level for most countries, and at a level of 51.6 for the Eurozone as a whole. Spain continues to be a European leader in this segment too, with its services PMI increasing by 3.2 points, reaching the 57.3 mark.

Manufacturing data in the U.S. showed some signs of improvement, with PMI increasing by 1.1 points to 49.4, a 9-month high. In contrast, U.S. services PMI was revised lower to 56.8 in December from a preliminary 58.5, but still showed the strongest gain in the services sector since March 2022. U.S. companies indicated that client demand had improved, with customers more willing to commit to new projects after presidential elections. Despite optimism over fewer regulations and more tax cuts under the incoming administration, concerns regarding tariffs and inflation still remain.

Benchmark 10-year bond yields

Source: Bloomberg and Signet Bank

A month of geopolitical frenzy

December saw major political turmoil across the globe. South Korea experienced yet another political crisis when President Yoon Suk Yeol attempted to declare martial law on the 3^rd of December, which was followed by his impeachment. On the 4^th of December the benchmark Kospi Index dropped 2.8% and the Korean won weakened against the U.S. dollar, approaching its weakest point since 2009. Timely intervention from the Korean National Assembly and financial authorities helped to stop the initial panic, with markets quickly rebounding, but questions about political stability continue to weigh on investors.

On the 16^th of December, German Chancellor Olaf Scholz expectedly lost a parliamentary confidence vote, triggering snap elections in February.

The European Commission projects a 0.1% decline in German GDP for 2024, with the Bundesbank forecasting a slightly more pessimistic 0.2% decline, showing Germany underperforming average Eurozone growth until 2026. However, not all is bad, as government debt, deficit and unemployment are projected to remain stable and potentially decrease throughout 2025 and 2026.

Following the collapse of the Assad government in Syria, the militant group Hayat Tahrir al-Sham (HTS) has taken control. Riad Abdul El Raouf, the newly appointed finance minister and the only former Assad affiliate still in a senior position, now faces the challenge of stabilizing Syria’s economy, which has contracted by 85% since 2011. The country’s currency reserves are believed to be as low as USD 200 million, while its debt to Iran is estimated between USD 30-50 billion.

High Yield bond Indexes

Source: Bloomberg and Signet Bank

Dollar enters 2025 on a strong footing, commodities poised for action

The U.S. dollar has entered 2025 with strength, while commodities continue to appear to be positioned for potential breakout scenarios. EUR/USD pair struggled throughout 2024, eventually giving way to dollar dominance. Recovery to the 1.0600–1.0700 range may present an attractive buying opportunity for the greenback, with further declines likely pushing the pair below or close to parity. A significant warning for dollar strength would only emerge if EUR/USD moves above 1.0800, while a break above 1.1000 could signal a longer-term shift favoring the euro.

Gold, after a strong 2024, has shown limited movement in December and is expected to consolidate within XAU/USD 2400–2700 range in the near term, currently trading at XAU/USD 2640. Silver saw a late-year pullback, maintaining its bullish outlook as long as prices stay above XAG/USD 26-27. Platinum remains subdued but could offer a favorable risk/reward proposition as volatility picks up. Oil continues to trade within a narrowing range, and tensions in the Middle East can spark increased volatility, with the current outlook suggesting a potential dip followed by a rebound to higher levels. Should Brent fall to the USD/bbl 60 range, incremental buying opportunities will arise.

Gold price, USD/oz

Source: Bloomberg and Signet Bank

Regional Highlights

The OMX Baltic Benchmark Index gained 1.6% in December. Meanwhile, Baltic central banks released their updated macroeconomic forecasts: Bank of Latvia projects Latvian GDP increase of 2.1% in 2025 and 3.0% in 2026, supported by private consumption, exports, and foreign investments. Inflation is expected to remain low at 1.4% in 2025 and 1.5% in 2026. Bank of Lithuania sees country’s GDP to grow by 3.1% in 2025 and 2026, and 3.0% in 2027. However, growth will be limited by labor inefficiencies, a worsening demographic situation, and slower global trade expansion. Bank of Estonia anticipates a 1.6% GDP growth for Estonia in 2025, with inflation remaining close to 4.0% due to tax hikes, and growth expected to reach 3.0% in 2026 and 2027.