Economic and Market Overview
Financial markets delivered mixed performance in the last quarter of the year amid heightened macroeconomic and geopolitical environment. Although some markets reached all-time highs, however, investors remained cautious, balancing optimism around AI and data centres with caution about potential downward adjustments in the face of economic uncertainty, tariffs, and geopolitical issues going into the next year. Geopolitical events like ongoing Russia-Ukraine war, conflicts in the Middle East, and impeachment of South Korean president after his failed martial law attempt, amongst other events, continued to impact investors’ sentiment towards financial markets in the final quarter of 2024. Bitcoin remained in focus in the last quarter as its price surged from $63000 at the start of October 2024 to $93000 at the end of December with all time high price of $108000 reached in the second half of December. This spectacular performance of the digital token was mainly driven by the Donald Trump’s victory in November elections as he is widely considered pro crypto, and traders are expecting crypto friendly regulations under his presidency.
The US economy remained strong despite high interest rates, however, European and UK economies struggled to show considerable growth amid uncertainties around timing and intensity of potential tariffs, sticky inflation and higher borrowing costs. China’s stimulus policies aimed at supporting economic growth and stabilizing stock markets provided short-term relief, but investors seemed to be more concerned about fiscal reforms and structural issues, especially real estate sector. Macroeconomic picture remained highly uncertain during Q4 where inflation rebounded after showing signs of softness in Q3, making it difficult for central banks to pivot as expected by the market participants. Moreover, jobs market also showed signs of weakening reflecting companies’ cost control measures. After recognizing the changing macro dynamics, central banks turned more cautious on their rate cutting endeavors. Central bank cut the rates less than what the market had expected and provided an indistinct outlook. Although there are still concerns over GDP growth rates in developed economies including Europe, UK, as well as in China, however, the US economy remained strong despite higher borrowing costs for both corporates and consumers.
Looking at the performance of major asset classes in Q4, equities markets provided mixed performance with Japan’s Nikkei 225 and US S&P 500 surging 5.2% and 3.4%, while Europe’s Euronext 100 and the UK FTSE 100 declined by 1.93% and 0.66%, respectively. Such performance was driven by strong economy in the US along with AI and technology optimism, but low economic growth in Europe and UK. Japanese’s equity performance was backed by corporate reforms and optimism. The benchmark for Shariah compliant equities DJ Islamic markets index ended the last quarter flat. On the commodity front, DJ commodity index ended the quarter flat while gold lost 1.35% after having a significant appreciation in previous quarters as US dollar strengthened. Lastly, DJ sukuk index ended the quarter with 1.73% drop in value as yields surged sharply during Q4 amid heightened uncertainty (bonds’ values drop as yields surge and vice versa) while UK GBP depreciated by 5.72% against US dollar.
Performance of Global Assets Q4 2024
The US 10-year yields reached lowest levels for year at the end of Q3, thereafter, the yields started rising sharply from 3.75% at the start of the quarter to end the Q4 at 4.55% amid heightened uncertainty around the interest rate changes and policies of the new US administration. Moreover, the Fed signalled just two rate cuts in 2025 compared to previously expected four cuts. The surging yield curve negatively impacted bonds/sukuks performance in the quarter as bonds’ values fall when yields surge. US exceptionalism debate, strong dollar, and expected, but uncertain, Trump’s tariffs policies drove treasury yields higher during the quarter.
10-Year Treasury Yields
Geopolitical situation remained intense in Q4 as Russia-Ukraine war continues with no end in sight. Similarly, the war on Gaza lingers and there is a growing danger of war extending to other parts of the Middle East. Highlights of key geopolitical events are as follows:
• The US-China ‘chip war’ continues to escalate, where the Biden administration has strengthened export controls on semiconductor technologies amid ongoing restrictions and strategic manoeuvres from both nations particularly targeting high-performance chips essential for AI and military applications.
• Israel and Hezbollah reached a ceasefire deal later in November after both sides accepted an agreement brokered by the US and France.
• South Korean MPs, amid massive protests across the country, successfully flopped President Yoon Suk Yeol’s attempt to impose martial law on 3 December. After that, the country’s lawmakers voted to impeach the President. Then later, a court in South Korea issued an arrest warrant against suspended president over his attempt to impose martial law in the democratic country.
Key News & Events in Q4 2024
UK
• The annual inflation rate in the UK edged up for a second month to 2.6% in November 2024 from 2.3% in October and 1.7% in September, matching forecasts.
• The Bank of England left the benchmark bank rate steady at 4.75% during its December 2024 meeting after delivering 25bps cut in November, in line with market expectations, as CPI inflation, wage growth and some indicators of inflation expectations had risen, adding to the risk of inflation persistence.
• The British economy stalled in Q3 2024, revised down from the first estimate increase of 0.1% and below a downwardly revised 0.4% in Q2.
• The UK Autumn Budget 2024 announced in October, presented by Chancellor Rachel Reeves, included substantial tax adjustments, public service funding increases, and support for economic growth.
• The unemployment rate was 4.3% from August to October 2024, unchanged from the previous period and aligning with expectations.
US
• The annual inflation rate in the US rose for a 2nd consecutive month to 2.7% in November 2024 from 2.6% in October and 2.4% in September, in line with expectations. The rise is partly influenced by low base effects from last year.
• The Fed announced another 25bps cut to the federal funds rate in December 2024 after delivering 25bps in November, marking the third consecutive reduction this year and bringing borrowing costs to the 4.25%-4.5% range, in line with expectations.
• The US economy expanded an annualised 3.1% in the third quarter of 2024, higher than 2.8% in the second estimate and above 3% in Q2. It is the biggest growth rate so far this year.
• The unemployment rate in the US went up to 4.2% in November of 2024 from 4.1% in the prior month, in line with market expectations.
• At the start of November, Republican candidate Donald Trump won 2024 elections with strong majority and declared the election victory as an “unprecedented and powerful” mandate to govern the world’s largest economy. Additionally, his party also won both chambers of Congress, giving him a considerable power to rule the country.
Europe
• The annual inflation rate in the Eurozone increased to 2.2% in November 2024 from 2% in October and 1.7% in September, but below 2.3% in the preliminary estimate. This year-end increase was largely expected due to base effects, as last year’s sharp declines in energy prices are no longer factored into annual rates.
• The European Central Bank (ECB) has decided to cut its key interest rates for the fourth time this year by 25 bps in December 2024, as expected. It was the second rate cut in last quarter of the year after cutting by 25bps in October. This move reflects a more favourable inflation outlook and improvements in monetary policy transmission.
• GDP in the Euro Area expanded 0.40% in the third quarter of 2024 over the previous quarter.
• Unemployment rate in the Euro Area remained unchanged during Q4 at 6.30%, which was announced in October.
• The EU’s decision to impose significant tariffs on Chinese EVs in October was a major shift in its relationship with China. The move was approved by a minority of member states, with 10 countries voting in favour, 12 abstaining, and five voting against.
China
• China’s annual inflation rate unexpectedly eased to 0.2% in November 2024 from 0.3% in the previous month and 0.4% in September, falling short of market forecasts of 0.5% and marking the lowest figure since June. This slowdown highlighted mounting deflation risks in the country despite recent stimulus measures from Beijing and the central bank’s supportive monetary policy stance.
• The People’s Bank of China (PBoC) maintained its key lending rates steady for the second straight month at December fixing after cutting in October, aligning with market estimates. The one-year loan prime rate (LPR), the benchmark for most corporate and household loans, was held at 3.1%. Meanwhile, the five-year rate, a reference for property mortgages, was unchanged at 3.6%. Both rates remain at record lows following rate reductions in October and July.
• China announced fiscal stimulus package (without disclosing size) in October. The ministry said that it would meaningfully increase government debt issuance to provide subsidies to support low-income households, the struggling property market, and restock state banks’ capital as part of efforts to provide momentum to economic growth.
• Chinese economy grew by a seasonally adjusted 0.9% in Q3 of 2024, after a 0.7% increase in Q2. It was the ninth straight period of quarterly rise, supported by recent government initiatives aimed at stimulating consumption, mitigating deflation risks, and reversing the downturn in the real estate sector.
• China’s surveyed unemployment rate was 5% in November 2024, unchanged from the previous month and matching market expectations.
• China threatened retaliation against EU tariffs on EVs putting brandy, dairy, and pork on target. Some Chinese companies are considering establishing production facilities within the EU, such as BYD, which plans to build a manufacturing base in Hungary.
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