Weekly Market Recap

Mortgage approvals for house purchases in the UK, an indicator of future borrowing, rose to the highest level since August 2022, according to Bank of England (BoE) data. Even so, other indicators showed consumer demand remained soft. Consumer credit growth slowed to its weakest level in nearly two years, according to the BoE, while the distributive trades survey of the Confederation of British Industry showed a sharper-than-expected drop in retail sales volumes in November and the retail sector’s worst confidence reading in two years.

During last week, domestic policy and geopolitical factors appeared to be large sentiment drivers. On Monday, investors seemed to welcome President-elect Donald 
Trump’s nomination of Scott Bessent, a veteran hedge fund manager, as Treasury secretary. Bessent is thought to bring a Wall Street mindset to the seat, prioritising economic stability and inflation control with a measured approach to tariffs, easing fears of an out-of-consensus selection.

That evening, however, the president-elect surprised many by posting on his social media site, Truth Social, that he planned to quickly impose 25% tariffs on imports from Mexico and Canada and an additional 10% tariff on imports from China. When trading opened Tuesday, shares of Ford and General Motors (GM) fell sharply on the news – GM declined -9.0% for the day – on concerns over the automakers’ heavy reliance on cross-border trade with Canada and Mexico, involving both the shipment of auto parts and final assembly. Nevertheless, the broader market shook off the news, with the S&P 500 rising for the seventh consecutive session, marking its longest winning streak in over two months.

News of a cease-fire agreement between Israel and Hezbollah, first reported Monday and formally announced Tuesday, seemed to support sentiment and may have overshadowed renewed tariff concerns. However, energy stocks fell on the news as oil prices pulled back in response to diminished fears of an expanding conflict involving Iran.

One factor supporting unusually high volumes over the trading week may have been Wednesday's release of closely watched economic reports. Mostly, these came in roughly in line with expectations, but there were some exceptions. Personal income rose 0.6% in October, roughly double consensus estimates, while personal spending rose 0.4%, a tick above expectations. Pending home sales also defied expectations for a decline and rose 2.0%, even as September’s gain was revised up to 7.5%, the strongest gain in nearly two years.

Conversely, the manufacturing sector appeared to remain in a slump. Durable goods orders missed expectations in October, rising only 0.2%, well below consensus expectations of around 0.5%. Excluding defence and transportation goods – commonly accepted as a proxy for capital investment – orders fell -0.2%.

According to a preliminary estimate, annual inflation in the eurozone accelerated for a second month in November to 2.3% from 2.0% in October. The increase was expected as last year’s declines in energy prices are no longer incorporated in the annual rates. However, underlying inflation unexpectedly eased. Services’ prices ticked down to 3.9% from 4.0%, while core inflation – which excludes volatile food, energy, alcohol and tobacco prices – remained at 2.7%. Financial markets still expect the European Central Bank (ECB) to lower borrowing costs next month, although the size of the reduction remains uncertain.

Mixed economic data showed that the German economy continued to struggle in the last quarter of this year. Retail sales in October decreased -1.5% sequentially in seasonally adjusted terms, much worse than a -0.5% drop forecast by analysts polled by FactSet. Still, the labour market demonstrated some resilience in November. The number of unemployed rose by a seasonally adjusted 7,000 to 2.86 million, much less than the 20,000 consensus forecast. The jobless rate held steady at 6.1%.

In France, Prime Minister Michel Barnier amended the proposed 2025 budget that seeks EUR 60 billion of savings, dropping plans to raise electricity taxes after far-right leader Marine Le Pen threatened to call a no-confidence motion and bring down the coalition government.

The People’s Bank of China injected RMB 900 billion into the banking system via its medium-term lending facility and left the lending rate unchanged at 2%, as expected. With RMB 1.45 trillion in loans set to expire next month, the operation resulted in a net withdrawal of RMB 550 billion from the banking system for November. According to Reuters, a sharp increase in local government bond issuance will add to liquidity pressures in the banking system toward the end of the year as Beijing ramps up efforts to stimulate the economy. With tighter liquidity conditions and threats of additional US tariffs, analysts anticipate that the government will implement further policies to consolidate the economy in 2025.

Profits at industrial firms fell by -10% in October from a year ago, narrowing from a -27.1% decline in September, the third straight monthly drop, according to the National Bureau of Statistics. The slower decline was partly attributed to the government’s support measures and profit growth in the equipment and high-tech manufacturing industries.

The yen strengthened to JPY 149.8 against the USD, from JPY 154.8 at the end of the previous week, buoyed by its perceived safe-haven characteristics. Further support for the yen came from a hot domestic inflation print, which stoked speculation about the potential timing of the next interest rate hike of the Bank of Japan (BoJ) – forecasts are largely split between December and January. The Tokyo-area core consumer price index (CPI), widely regarded as a leading indicator of nationwide trends, rose 2.2% year on year in November, higher than consensus expectations and up from 1.8% year on year in October.

Japan’s Prime Minister Shigeru Ishiba made a speech to parliament outlining his latest policy vision as he seeks approval for an extra budget to fund a new stimulus package aimed at boosting the economy, particularly in rural areas, and helping to counter the adverse effects of inflation on businesses and households. Measures include subsidies to curb rising energy costs, cash handouts to low-income households, and an increase in the tax-free salary threshold to boost disposable incomes. In a sign of policy continuity with his predecessor, Fumio Kishida, Ishiba wants to bring about conditions in which wage gains outpace inflation and growth is investment-driven.

Australia's headline CPI eased to -0.3% month on month in October, below market consensus. Public subsidies, such as rent assistance and energy subsidies, continued to have a meaningful impact on headline CPI. On the other hand, trimmed mean CPI, the preferred inflation measure of the Reserve Bank of Australia (RBA), rose from 3.2% to 3.5% year on year amid a pick-up in rents, household goods and recreation prices. Thus, despite the volatile monthly headline CPI data, the RBA is still likely to hold on to its current cash rate in the near term. Australian household credit growth remained broadly stable at 5.5% for the three months on an annualised term.

Last week, the MSCI All Country World Index (MSCI ACWI) rose 1.0% (3.8% in November, 20.9% YTD).

In the US, the S&P 500 Index gained 1.1% (5.9% in November, 28.1% YTD), recording another week of gains and reaching record intraday highs. Markets were closed Thursday in observance of Thanksgiving Day, although trading was relatively robust during the holiday runup. Markets also closed early on Friday.

Growth stocks outperformed value shares, and smaller caps modestly outpaced large caps. The Russell 1000 Growth Index returned 1.1% (6.5% in November, 32.2% YTD), the Russell 1000 Value Index 1.0% (6.4% in November, 22.8% YTD) and the Russell 2000 Index 1.2% (11.0% in November, 21.6% YTD), hitting on Monday an intraday high that eclipsed the record high it had established a little over three years before. The technology-oriented Nasdaq Composite ended the week up 1.1% (6.3% in November, 28.9% YTD).

In Europe, the MSCI Europe ex UK Index ended the week 0.3% higher (0.1% in November, 7.3% YTD), overcoming uncertainty about US trade tariffs and the outlook for interest rates. Major stock indexes were mixed. Germany’s DAX Index added 1.6% (2.9% in November, 17.2% YTD), France’s CAC 40 Index lost -0.2% (-1.5% in November, -1.2% YTD) and Italy’s FTSE MIB Index retreated -0.2% (-1.3% in November, 16.2% YTD). Switzerland’s SMI Index advanced 0.4% (-0.2% in November, 9.1% YTD). The euro appreciated versus the US dollar, ending the week at USD 1.06 for EUR, up from 1.04.

In the UK, the FTSE 100 Index rose 0.4% (2.6% in November, 11.0% YTD), and the FTSE 250 Index gained 1.0% (2.1% in November, 8.7% YTD). The British pound strengthened versus the US dollar, ending the week at USD 1.27 for GBP, up from 1.25.

Japan’s stock markets registered modest losses over the week. The TOPIX Index declined -0.6% (-0.5% in November, 15.8% YTD), and the TOPIX Small Index retreated -0.6% (0.1% in November, 10.8% YTD). Markets trended lower as geopolitical risks weighed on global investor risk appetite, driving demand for assets perceived as safer. Subsequent yen strength posed a headwind for Japan’s export-heavy industries.

In Australia, the S&P ASX 200 Index edged up 0.5% (3.9% in November, 16.4% YTD) on moderating Australia’s headline inflation and abating interest rates globally. Australian government bond yields decreased with the curve flattening. The Australian dollar modestly strengthened against the US dollar by 0.3%.

The MSCI Emerging Markets Index was -0.8% lower (-3.6% in November, 8.1% YTD), with a positive contribution to performance from the stock markets of China and India and a negative contribution from those of Taiwan, South Korea and Brazil.

Chinese equities rose as hopes for greater government support offset concerns about potential tariff hikes in the US. The Shanghai Composite Index gained 1.8% (1.5% in November, 15.2% YTD), and the blue-chip CSI 300 Index added 1.3% (0.7% in November, 17.5% YTD). Hong Kong's benchmark Hang Seng Index was up 1.0% (-4.2% in November, 19.0% YTD).

In Mexico, President-elect Trump’s plans to impose a 25% tariff on all imports from Mexico would remain in place until the flow of illegal immigration and drugs, particularly fentanyl, across the US southern border is curtailed. Trump indicated this would be one of his first executive orders.

According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, this approach is in line with Trump’s previous use of tariffs during his first term. In 2018, he imposed tariffs on Mexican steel and aluminium based on national security concerns. However, these were later lifted as part of the United States-Mexico-Canada Agreement trade negotiations. In a separate episode, Trump threatened Mexico with progressive tariffs on all exports (starting at 5% and potentially rising to 25%) but withdrew the threat when Mexico agreed to stop the flow of migrants from Central America to the US. Mexico’s concessions included deploying its National Guard to both its northern and southern borders and implementing the “Remain in Mexico” programme, which required asylum seekers to stay in Mexico while their US cases were being processed.

Gifford believes that Trump favours tariffs as a negotiating tactic, with big threats aimed at securing important concessions from trading partners before settling into a new equilibrium. Such tactics are not without risks, however. Mexican President Claudia Sheinbaum telling Trump that Mexico will be forced to retaliate should he follow through could backfire if neither side blinks. While unlikely, given how much trade is at stake, Mexico calling Trump’s bluff might push him to escalate even more, even if it means a round or two of tariffs to prove he means business. As a result, Gifford expects uncertainty to stay elevated at least until Trump’s inauguration and the first executive orders are issued after that.

Gifford does not believe that the US and Mexico are about to discard their important trade relationship or enter into any drawn-out conflict. He would not be surprised if the Mexican president concedes and gives Trump what he wants, likely by following in her predecessor’s footsteps by deploying troops at the border to curtail illegal immigration. However, Gifford believes that risks are to the downside.

In Brazil, the government issued its mid-month inflation report, in which inflation was measured at a month-over-month rate of 0.62%, higher than an expected reading of 0.50%. Most of the deviation was due to airline fares, which can be very volatile. Still, there were some broader inflationary pressures, especially in services, while goods inflation surprised on the downside. Also, meat prices remain an inflationary concern, with wholesale beef prices up about 50% over the last couple of months due to a combination of drought impacting cattle supply and surging beef exports. On the positive side, decent recent rains mean that the monthly electricity tariff will likely decrease in the near term and that the 2024-2025 planting season should have a good start.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 1.1% (1.2% in November, 4.2% YTD), the Bloomberg Global High Yield Index (hedged to USD) 0.5% (1.3% in November, 10.9% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index 1.1% (0.7% in November, 7.2% YTD).

Trump’s pick of Bessent as Treasury leader appeared to drive a sharp decrease in long-term Treasury yields over the week. Over the week, the 10-year Treasury yield decreased -23 basis points (bp) to its lowest level since 24 October of 4.17% from 4.40% (down -12bp in November, up 29bp YTD). The 2-year Treasury yield declined -23bp, ending the week at 4.15% from 4.38% (down -2bp in November, down -10bp YTD).

Over the week, the 10-year German bund yield decreased -15bp, ending at 2.09% from 2.24% (down -30bp in November, up 6bp YTD).

The 10-year UK gilt yield decreased -14bp, ending the week at 4.24% from 4.38% (down -20bp in November, up 71bp YTD).

The 10-year Japanese government bond yield fell to 1.04% from 1.08% at the end of the previous week. It continued to hover near its highest level in 13 years on BoJ rate hike speculation. BoJ Governor Kazuo Ueda has repeatedly said that interest rates would be increased if the economy and prices performed in line with the central bank’s forecasts.