Equity markets were weak in December. Australian and Overseas Developed Market (Hedged) equities delivered negative returns. Sentiment seemed to weaken because of the statement that went with the US Federal Reserve’s decision to drop interest rate by 25bps. That is, that additional rate cuts may be more limited than previously expected.
USA
Driven by the US Federal Reserve’s outlook, US equities underperformed broader Developed Markets. The S&P 500 returned -2.4% in December. Returns over the previous 12 months have been strong, and reflect ongoing strength in the US economy. Employment data is also robust, with Non-Farm payrolls released after month-end showing some tightness in the US labour market.
Europe
The MSCI Europe Index (in EUR) returned-0.5%. The European economy remains soft, and business activity indicators point to weakness in the manufacturing sector. The European Central Bank announced its fourth rate cut of the year in December 2024, and expectations for the inflation outlook were reduced. The European Central Bank confirmed that the disinflation process is well on track.
Asia
In Asia, Chinese and Japanese equities went against the broader equity market trend. Chinese equities returned 2.8% in local currency and Japanese equities returned 4.3%. Weakness in the Japanese Yen may have improved the earnings outlook for export-driven Japanese companies.
Australia
Australian equities underperformed Developed Market equities (returned -3.1%). Listed Property was weaker (returned -5.8%). The Financials and Materials sectors were both also more than 4% weaker. At its December meeting, the Reserve Bank of Australia (RBA), maintained the cash rate at 4.35%. The RBA noted that, although inflation remains higher than they would like, they are increasingly confident that inflation is moving sustainably toward target.
Currency and bonds
Overseas bonds were marginally weaker in December, returning -0.9%. Ongoing strength in US economic data may have been a driver for slightly higher US bond yields. Australian bonds were marginally stronger, returning 0.5%. The Australian 10-year government bond yield rose 3bps to 4.37% at the end of December, whilst the US 10 year yield rose more materially; by 40bps to 4.57%.
Most major currencies were weaker relative to the US Dollar, though the underperformance of the AUD relative to the USD was pronounced, returning -5.0%. The AUD has now fallen -10.8% over the previous quarter. This could be due to the economic strength of the USA relative to Australia, potential weakness in the Chinese economy, and expected rate cuts by the RBA over 2025.