Global Markets Weekly Wrap KW 49 : U.S. Stock Markets Rally Amid Mixed Global Economic and Political Trends

Global Markets Weekly Wrap KW 49 : U.S. Stock Markets Rally Amid Mixed Global Economic and Political Trends 

U.S. financial markets experienced a mixed performance during a week that showcased a strong rally in growth stocks, propelling certain major indexes to new record highs. The S&P 500 Index, the Dow Jones Industrial Average, and the Nasdaq Composite all continued their ascent, marking new milestones. However, the Russell 2000 Index, which tracks smaller-cap stocks, saw a downturn following two weeks of relative outperformance when compared to its larger-cap counterparts. As indicated by the Russell 1000 indexes, growth stocks decisively outshined value stocks, with a notable margin of outperformance measuring 5.53 percentage points—the most significant gap observed since mid-March 2023.

A closer look at sector-specific performance reveals stark contrasts in the market. Consumer discretionary, communication services, and information technology sectors enjoyed notable gains exceeding 3% for the week. On the other hand, traditionally value-oriented sectors like energy, utilities, and materials faced steep declines, each falling more than 3%. Meanwhile, geopolitical developments—including notable political events in France and South Korea—dominated early-week headlines but seemed to exert minimal influence on the U.S. markets.

The labor market became a focal point of attention as key reports were released, providing valuable insights into the U.S. economy's trajectory. November's nonfarm payroll report, unveiled on Friday, revealed that the economy added a seasonally adjusted 227,000 jobs—a figure slightly exceeding economists' expectations. This marked a sharp recovery from October's disappointing performance, which had been marred by the aftermath of hurricanes in the southeastern United States and a major strike at Boeing. Despite the uptick in job creation, the unemployment rate edged up slightly to 4.2%. Major stock indexes responded positively to the report, with gains reflecting investor optimism about the labor market's resilience ahead of the Federal Reserve's December policy meeting.

Further labor-related data released earlier in the week indicated that job openings in October rose to 7.74 million from September's revised figure of 7.37 million. Layoffs remained largely unchanged during the period. However, the number of workers voluntarily leaving their jobs—a metric often interpreted as a sign of labor market strength—climbed to 3.3 million. Additionally, private payrolls firm ADP reported that private employers added 146,000 jobs in November, while annual wage growth stood at 4.8%. Despite the overall positive tone, ADP's chief economist, Nela Richardson, highlighted mixed industry performance, pointing to weakness in manufacturing, financial services, and leisure and hospitality sectors.

Market participants continued to closely monitor Federal Reserve developments, with speculation building around the potential for an interest rate cut at the December meeting. Federal Reserve Governor Christopher Waller expressed tentative support for a policy rate reduction, contingent upon the absence of unexpected economic data shocks. In contrast, Fed Chair Jerome Powell adopted a more cautious stance, emphasizing the overall strength of the U.S. economy while suggesting a measured approach to policy adjustments. This discourse, combined with labor market data, fueled market expectations for a quarter-percentage-point rate cut at the upcoming meeting.

U.S. Treasury yields experienced declines across the curve, resulting in positive returns for bond investors. The week concluded with Treasury yields falling further after the release of the robust employment report. Municipal bonds also saw gains, outperforming Treasuries on a total return basis. Investment-grade corporate bonds performed well during the week, with many new issues being oversubscribed and issuance volumes slightly below forecasts.

Major stock indexes posted the following closing levels for the week: the Dow Jones Industrial Average settled at 44,642.52, reflecting a weekly decline of 268.13 points and a year-to-date gain of 18.45%; the S&P 500 closed at 6,090.27, up 57.89 points for the week with a 27.68% year-to-date increase; the Nasdaq Composite rose by 641.61 points to finish at 19,859.77, marking a 32.30% year-to-date gain. Meanwhile, the S&P MidCap 400 and Russell 2000 indexes registered weekly declines, closing at 3,331.37 and 2,408.99, respectively. These performance metrics underscore the divergent trends observed across various market segments.

Turning to European markets, stocks generally advanced during the week, supported by easing political concerns in France and expectations of accelerated policy easing by the European Central Bank (ECB). The pan-European STOXX Europe 600 Index rose 2.00%, while individual national benchmarks also posted gains. Germany's DAX climbed 3.86%, Italy's FTSE MIB added 4.00%, and France's CAC 40 gained 2.65%. The UK's FTSE 100, however, saw a more modest increase of 0.26%.

Political turmoil in France captured significant attention as Prime Minister Michel Barnier's government collapsed following a parliamentary no-confidence vote. This development initially widened yield spreads between French and German bonds, signaling heightened political and financial risks. However, markets stabilized as President Emmanuel Macron pledged to appoint a new prime minister and engage with political leaders to form a unity government.

Economic data from Europe painted a mixed picture. Retail sales in the eurozone contracted by 0.5% in October after a 0.5% increase in September, with declines concentrated in non-food products and auto fuel. Germany's manufacturing sector faced continued challenges, with industrial output falling 1.0% month over month and factory orders decreasing by 1.5%. ECB Chief Economist Philip Lane suggested that the bank might pivot away from its data-dependent policy stance to focus on forward-looking risks, hinting at potential shifts in its monetary policy framework.

In the UK, Bank of England Governor Andrew Bailey indicated the possibility of up to four rate cuts in the coming year if the economy aligns with the central bank's projections. This dovish tone contrasted with the BoE's earlier tightening measures.

In Japan, equities advanced as the Nikkei 225 gained 2.3% and the broader TOPIX rose 1.7%, buoyed by a weaker yen, which bolstered export-driven sectors. The yen depreciated to the mid-150 range against the U.S. dollar. Japanese government bond yields remained stable amid ongoing uncertainty regarding the Bank of Japan's rate hike timing. Recent remarks from BoJ officials suggested that the decision on a potential December or January rate hike would hinge on data concerning wages and economic growth. Economic indicators showed nominal wages rising 2.6% year over year in October, while real wage growth was flat. Household spending, however, contracted for the third consecutive month.

In China, stock markets posted gains driven by expectations of additional stimulus measures and resilient manufacturing activity. The Shanghai Composite Index rose 2.33%, while the CSI 300 added 1.44%. Manufacturing data indicated modest expansion, with the official Purchasing Managers' Index (PMI) rising to 50.3 in November. However, the property market continued to struggle, with new home sales by top developers declining 6.9% year over year in November. Analysts anticipate further policy measures to support the sector and broader economic growth.

South Korea faced political upheaval following the declaration and subsequent withdrawal of martial law. The opposition's move to impeach President Yoon Suk Yeol has created uncertainty, although financial regulators' swift actions helped stabilize markets. Meanwhile, Poland's central bank left interest rates unchanged at 5.75%, citing persistent inflationary pressures and weak economic conditions in the eurozone. Policymakers expect inflation to remain elevated due to rising energy costs and regulatory factors.

The week's developments across global markets reflect a complex interplay of economic, political, and monetary policy factors, underscoring the challenges and opportunities facing investors in an evolving landscape. 

Checklist for the next week

Major Economic Events in the US Include: 

Initial Jobless Claims; CPI; PPI Final Demand MoM; MBA Mortgage Applications; Continuing Claims; Wholesale Inventories MoM;

Major Economic Events Around the World Include: 

Australia RBA Cash Rate Target; Mexico CPI; Italy Industrial Production; Germany CPI; South Africa Industrial Production NDA;