Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Emerging market stock indices have underperformed the broad equity rally this year. They’ve lagged behind not only American, Japanese and continental European equities, but even UK stocks. In sterling terms they’ve barely broken even.With the Federal Reserve signalling that it is probably done in raising interest rates, and the bond market pricing in a series of cuts next year, it feels right to ask whether it’s time for emerging markets to play catch-up.Lumping together firms listed across such a disparate collection of geographies can look lazy at best. Emerging nation equity markets vary in their politics, economic challenges and institutional arrangements. Turkey is a long way from Taiwan in many ways. Collectively, they tend to do well when the US dollar is weakening, the global rates outlook is benign, the world economy is growing briskly and international trade volumes are increasing. But what unites them beyond MSCI index taxonomy is the importance of country-level macro risk factors to their performance.China makes up almost 30 per cent of the market and its very public property bust has hit the domestic economy hard. Regulatory uncertainty continues to haunt equity managers after the crackdown on technology and education companies.Furthermore, the international picture is difficult for China. Since Trump introduced waves of tariffs on a range of Chinese imports in 2018, its share of US goods imports has decreased by around a third, relegating it to behind Mexico as source of imported goods. Trading at less than 10 times next year’s expected earnings, Chinese stocks are cheap for a reason.By contrast, the next largest markets — India and Taiwan — rank among the most highly valued in the emerging universe. India is enjoying a domestic boom. According to the IMF, the rollout of the “India Stack” — a government-backed digital payments initiative — has boosted tax receipts by bringing a host of activities into the formal economy, and led to a huge expansion of financial services. The government has also maintained large fiscal deficits and farmed its tax windfall back into the economy in the form of public investment.Infrastructure is being upgraded and foreign companies welcomed. More than one in five JPMorgan and Goldman Sachs employees now work in often-gleaming new Indian campuses. But accessing this structural growth story comes at a cost. Priced at more than 22 times next year’s expected earnings, India is now the most highly valued major equity market in the world.Taiwanese market returns, like those of South Korea, have been flattered by the global tech boom: tech stocks account for more than 70 per cent and around half of their markets’ capitalisations, respectively. TSMC, the world’s largest contract chipmaker, alone accounts for more than 40 per cent of the Taiwanese market. Future returns will be intimately tied to the fortunes of the global chip market, absent local geopolitical flashpoints.Away from Asia, returns have been generally good. Strong markets in Brazil and Mexico have delivered handsome returns. But EM Advisors, a specialist research boutique, warns that with Brazilian interest rates substantially above nominal gross domestic product growth and the economy falling into recession, headwinds are building for company earnings and fiscal authorities. Some eastern Europe markets have delivered spectacularly, but they only have tiny index weights.While asset allocators often spend more time thinking about geopolitics than is ultimately warranted, 2024 presents an electoral labyrinth. The most important election for emerging equities will be the US presidential poll in November, the result of which has the potential to destabilise every market. Beyond this, countries accounting for more than half the market cap of the MSCI Emerging Market index will see general elections — no mean feat considering that autocracies account for almost 35 per cent of the index.Votes in Indonesia and South Korea don’t look as if they carry much potential for significant market impact. In India, Modi’s re-election is all but assured, and the African National Congress is unlikely to lose outright in South Africa. Claudia Sheinbaum, President Andrés Manuel Lopez-Obrador’s preferred candidate, leads the polls by a huge margin in Mexico. But Taiwan’s general election in January looks much harder to call. And given the global importance of cross-straits relations, its outcome has broader ramifications.Global equity valuations are on the rich side of their post-1990 average. Offered at less than 12 times expected earnings, emerging equity market valuations by contrast are cheap to their own history. The consensus for a benign global bond market outlook and soft landing make the valuation case tempting. But hot wars in Europe and the Middle East, and a congested electoral calendar, warrant some geopolitical risk premium. And with the global economy softening and trade volumes falling, putting money into the market on a catch-up trade looks unnecessarily speculative. More

NEW YORK (Reuters) -The Federal Reserve’s dovish December pivot has boosted the case for the weakening dollar to keep falling into 2024, though strength in the U.S. economy could limit the greenback’s decline. After soaring to a two-decade high on the back of the Fed’s rate hikes in 2022, the U.S. currency has been largely range-bound this year on the back of resilient U.S. growth and the central bank’s vow to keep borrowing costs elevated.The dollar was on track for a 2% loss this year against a basket of its peers, its first yearly decline since 2020. The December Fed meeting marked an unexpected shift, after Chairman Jerome Powell said the historic monetary policy tightening that brought rates to their highest level in decades was likely over, thanks to cooling inflation. Policymakers now project 75 basis points of cuts next year. Falling rates are generally seen as a headwind for the dollar, making assets in the U.S. currency less attractive to yield-seeking investors. Though strategists had expected the dollar to weaken next year, a faster pace of rate cuts could accelerate the currency’s decline. Still, betting on a weaker dollar has been a perilous undertaking in recent years, and some investors are wary of jumping the gun. A U.S. economy that continues to outperform its peers could be one factor presenting an obstacle for bearish investors.The Fed’s aggressive monetary policy tightening, along with post-pandemic policies to boost U.S. growth, “fueled the notion of American exceptionalism and delivered the most powerful dollar rally since the 1980s,” said Kit Juckes, chief FX strategist at Societe Generale (OTC:SCGLY). With the Fed set to ease policy, “some of those gains should be reversed,” he said. FADING STRENGTH? Getting the dollar right is key for analysts and investors, given the U.S. currency’s central role in global finance. For the U.S., a weak dollar would make exports more competitive abroad and boost the profits of multinationals by making it cheaper to convert their foreign profits into dollars. About a quarter of S&P 500 companies generate more than 50% of revenues outside the U.S., according to FactSet data.An early December Reuters poll of 71 FX strategists showed expectations for the dollar to fall against G10 currencies in 2024, with the greater part of its decline coming in the second half of the year.Whether they’re right may come down to how the U.S. economy performs compared to its global peers next year and the pace at which central banks adjust monetary policy. So far, it’s been an uneven picture. In the eurozone, a downturn in business activity deepened in December, according to closely watched surveys that show the bloc’s economy is almost certainly in recession. Still, the European Central Bank has pushed back against rate cut expectations as it remains focused on fighting inflation. The euro is up more than 3% against the dollar this year. The “growth slowdown is more entrenched in other economies,” said Thanos Bardas, senior portfolio manager at Neuberger Berman, who is bullish on the dollar over the next 12 months. “For the U.S. it will take a while for growth to slow down.”Others, however, see areas of strength, particularly in Asian economies. Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, says he believes the market is “way too pessimistic” on the outlook for growth in China and India. Accelerating growth could boost the countries’ appetite for raw materials, benefiting commodity currencies such as the Australian, New Zealand and Canadian dollars.China will step up policy adjustments to support an economic recovery in 2024, according to state media reports.Jack McIntyre, portfolio manager at Brandywine Global in Philadelphia, is counting on U.S. growth slowing while Chinese growth picks up. He has been selling the dollar to fund the purchase of Asian currencies.”The dollar’s bull run is very mature,” he said. The International Monetary Fund in October forecast the U.S. economy would grow by 1.5% in 2024, compared to 1.2% for the eurozone and 4.2% for China. Of course, the dollar’s trajectory could depend on how much Fed easing and falling inflation is already reflected in its price. Futures tied to the Fed’s policy rate show investors factoring in more than 150 basis points in cuts next year, about twice as much as Fed policymakers have penciled in. “If inflation stalls and does not continue to decline that’s where the case grows for the Fed to hold off,” said Matt Weller, head of market research at StoneX. “That would certainly be a bullish development for the dollar.” More

NEW YORK (Reuters) -The U.S. stock market’s hefty gains in 2023 could provide a lift for equities next year, if history is any guide. The S&P 500 ended the year on Friday with an annual gain of just over 24%. The benchmark index also stood near its first record closing high in about two years. Market strategists who track historical trends say that such a strong annual performance for stocks has often carried over into the following year, a phenomenon they attribute to factors including momentum and solid fundamentals.”What we continue to come back to is solid gains for next year,” said Adam Turnquist, chief technical strategist at LPL Financial (NASDAQ:LPLA). “Maybe we will have a little bit of short-term pain but the long-term gain is definitely there when we look at the data.”Stocks built up a head of steam in 2023, with the S&P 500 up 11% in the fourth quarter alone. This could translate to strength in the new year.Data from LPL Research going back to 1950 showed that years following a gain of 20% or more have seen the S&P 500 rise an average of 10%. That compares to an average 9.3% annual return. Such years are also more frequently positive, with the market ending the year up 80% of the time, versus 73% overall. “Momentum begets momentum,” Turnquist said. “I also believe themes that are capable of driving a market up (at least) 20% are typically durable trends persisting beyond a calendar year.”LPL Research has a 2024 year-end target range for the S&P 500 of 4,850 to 4,950, but the firm sees potential upside above 5,000 if lower interest rates support higher valuations, companies achieve double-digit earnings growth and the U.S. economy avoids recession. The index was last at 4,769.83.Investor hopes for an economic soft landing will get an early test next Friday, with release of the monthly U.S. employment report. Ryan Detrick, chief market strategist at Carson Group, notes that stocks have seen strong gains after rebounding from steep drawdowns. Since 1950, there have been six times when the S&P 500 rebounded by at least 10% after falling 10% or more the previous year. Each time the index’s bounce continued for a second year, returning an average of 11.7%, Detrick’s data showed. The S&P 500 tumbled over 19% in 2022. Detrick noted the data as part of a recent commentary on why 2024 “should be a good one for the bulls.”Reaching a record high could be another bullish sign for stocks. Since 1928, there have been 14 instances of a gap of at least one year between S&P 500 all-time highs, according to Ed Clissold, chief U.S. strategist at Ned Davis Research. The S&P 500 went on to rise an average of 14% a year after a new high was reached, rising 13 of 14 times, according to Clissold.Further tests of the market’s strength will arrive quickly. U.S. companies start to report fourth-quarter results in the next couple of weeks with investors anticipating a much stronger year for profit growth in 2024 after a tepid 3.1% increase in 2023 earnings, according to the latest LSEG estimates.Investors are also awaiting the conclusion of the Fed’s first monetary policy meeting of the year in late January for insight into whether policymakers hew to the dovish pivot they signaled in late December, penciling in 75 basis points of rate cuts for 2024. Indeed, signs the economy is starting to wobble following the 525 basis points in Fed rate hikes since 2022 could hinder momentum for stocks. By the same token, accelerating inflation in 2024 could delay expected rate cuts, putting the market’s soft-landing hopes on hold. “History is a great guide, but never gospel, and I think we have to acknowledge that,” said Sam Stovall, chief investment strategist at CFRA.However, data Stovall looks at foreshadows a solid 2024, including history regarding presidential election years. The S&P 500 has gained all 14 times in the year that a president has sought re-election, regardless of who wins, with an average total return of 15.5%, according to Stovall.”Basically, all of the indicators that I look at point to a positive year,” Stovall said. More

NEW YORK (Reuters) – The Federal Reserve Bank of New York said on Friday it accepted $1.018 trillion at its overnight reverse repo facility, as inflows to the central bank liquidity facility surged on the final trading day of the year. Friday’s inflows were expected to jump and were well above the $829.6 billion seen on Thursday. Friday’s inflows were the first time above $1 trillion since Nov. 13. The Fed’s reverse repo facility exists to put a floor underneath short-term interest rates and is a key tool in the Fed’s efforts to influence the economy to achieve its employment and inflation mandates. The facility has seen big inflows over recent years amid strong Fed stimulus work and peaked at a record $2.6 trillion on Dec. 30, 2022. The facility has been shrinking markedly in recent weeks as the Fed continues to draw down liquidity and other money market securities prove more attractive to investors relative to the 5.30% rate offered on reverse repos. Money markets are often unsettled in the final days of any year and it’s become a normal pattern for the firms eligible to use the reverse repo facility to do so more aggressively. Some analysts expected ahead of Friday for any surge into reverse repo to quickly dissipate: Forecasters at Wrightson ICAP (LON:NXGN) are eyeing about a $400 billion decline in reserve repo inflows over the next week or so. The New York Fed also reported Friday that there were zero inflows into its Standing Repo Facility, which suggests any dislocations or liquidity needs in money markets were not substantial. More

CHRISTIANSTED, St. Croix (Reuters) – U.S. President Joe Biden on Friday called Russia’s latest missile barrage on Ukraine a “stark reminder” that Russian President Vladimir Putin remained committed to destroying Ukraine and said “he must be stopped.”Biden, in a statement issued during his vacation in St. Croix, said the overnight attack, which killed 31 civilians and wounded over 120 across Ukraine, was the largest aerial assault since Moscow launched its invasion in February 2022.”It is a stark reminder to the world that, after nearly two years of this devastating war, Putin’s objective remains unchanged. He seeks to obliterate Ukraine and subjugate its people. He must be stopped,” Biden said.Biden said Ukraine used air defense systems that the United States and its allies and partners had provided to successfully intercept and destroy many of the missiles and drones launched by Russia, and he urged Congress to approve continued aid.”Unless Congress takes urgent action in the new year, we will not be able to continue sending the weapons and vital air defense systems Ukraine needs to protect its people. Congress must step up and act without any further delay,” Biden said.The United States on Thursday said it would provide up to $250 million in arms and equipment to Ukraine in a final aid package this year, as top officials continued to urge lawmakers to approve another $61 billion in aid to the war-torn country.Republicans are refusing to approve the assistance requested by Biden unless Democrats agree to tighten security along the U.S.-Mexico border.The White House has warned that without the additional appropriation U.S. aid will run out by the end of the year for Ukraine’s fight to retake territory occupied by Russian forces.Congress has approved more than $110 billion for Ukraine since Russia’s invasion, but it has not approved any funds since Republicans took control of the House of Representatives from Democrats in January 2023.Biden said the stakes of the fight extended far beyond Ukraine to the entire NATO alliance and the security of Europe, and warned of risks to the United States.”When dictators and autocrats are allowed to run roughshod in Europe, the risk rises that the United States gets pulled in directly,” he said. “We cannot let our allies and partners down. We cannot let Ukraine down. History will judge harshly those who fail to answer freedom’s call.”Separately, Biden’s national security adviser, Jake Sullivan, who is also in St. Croix, said he discussed reports of a missile temporarily entering Polish airspace with Polish Secretary of State Jacek Siewiera in a call on Friday, the White House said.Sullivan expressed the United States’ solidarity with Poland, and pledged technical assistance as needed. He said Biden is following the issue closely. More

The year began with widespread expectations among economists, and many Fed officials themselves, that a recession would unfold under the weight of aggressive central bank interest rate increases. It came to an end with many confident that outcome could be avoided.Moreover, Fed officials in their final meeting of the year signaled that the rate-increase cycle wasn’t merely over – a new cycle of rate reductions was likely in the cards for 2024.The relatively benign run of figures that set the stage for that is, of course, now history, and just how soon officials can turn to that policy pivot rests on what the data in 2024 brings.That rush begins in the first two weeks of the year with major readings of the job market, consumer spending and inflation due as the year kicks off.Here is a guide to some of the numbers shaping the policy debate:INFLATION (PCE released Dec. 22; next release CPI, Jan. 11):Annual inflation by the Fed’s preferred Personal Consumption Expenditures Price Index fell to 2.6% in November and on a monthly basis prices declined for the first time since April 2020. The “core” index excluding food and energy prices also declined to 3.2%, the lowest that key gauge of trend inflation has been since April 2021.Fed officials at their final meeting of the year forecast continued improvement in both measures in 2024. Another measure, the Consumer Price Index, declined to 3.1% year-on-year in November while the core rate held steady at 4.0%. Annualized measures of the monthly rate over the last few months, however, show these gauges continuing to decline.RETAIL SALES (Released Dec. 14; next release Jan. 17):Retail sales rose 0.3% in November, another in the series of “upside surprises” the economy delivered over the course of the year. “Core” sales, which strip out gasoline, autos, building materials and food services, and more closely align with estimates of economic growth, also outpaced forecasts to come in at 0.4% in the latest sign of the resilience of the U.S. consumer. On a trend basis, consumer spending rates are slowing in a way the Fed is hoping to see as it watches for signs the fast rate hikes it has imposed have begun to trim overall demand for goods and services. EMPLOYMENT (Released Dec. 8, next release Jan. 5):Job growth in November jumped to 199,000 from 150,000 the month before, and the unemployment rate fell to 3.7% from 3.9%. Even with the end of labor strikes involving about 40,000 workers, the latest employment report showed continued steady job gains. Alongside improved labor supply, with the number of available workers up more than half a million for the month, the report is consistent with the Fed’s view of an economy that can continue growing while inflation also ebbs. The pace of annual wage growth also continued a slow decline, though at a 4.0% annual pace it remains higher than many Fed officials feel is consistent with price stability.JOB OPENINGS (Released Dec. 5, next release Jan. 3):Fed Chair Jerome Powell keeps a close eye on the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) for information on the imbalance between labor supply and demand, and particularly on the number of job openings for each person without a job but looking for one. The ratio dropped considerably in October to 1.34-to-1, the lowest since August 2021 when the economy was in the early stages of the pandemic recovery. The October number is close to the 1.2-to-1 level seen just before the health crisis. Other aspects of the survey, like the quits rate, also have edged back to pre-pandemic levels. More

(Reuters) – Argentine President Javier Milei has sent a reform bill to Congress proposing far-reaching changes to the country’s tax system, electoral law and public debt management.The push to reshape South America’s second-largest economy with an omnibus bill requires approval from lawmakers in both chambers of Congress, where Milei’s coalition holds a small minority of seats. WHAT ARE THE MAJOR REFORMS IN THE BILL?The bill has 664 articles that range from allowing the privatization of 41 public companies, eliminating the presidential primary vote and introducing a broad 15% tax on most exports.The government also proposed raising export taxes for soy and its derivatives to 33% from 31%. Argentina is the world’s No. 1 exporter of processed soy.The bill aims to introduce tax amnesties for Argentines, allowing them to register and repatriate some undeclared assets such as stocks, cryptocurrencies and cash.A reform to public debt management would remove limits on sovereign bonds issued overseas and eliminate some conditions on restructuring debt.Changes to Argentina’s proportional representation electoral system would raise the number of lawmakers in each district to one per 161,000 inhabitants, from one per 180,000 inhabitants. This would give more power to the populous province of Buenos Aires in the lower house of Congress, according to a note to clients by consultancy firm 1816. Among the more controversial reforms cited, is a call to cede some legislative power to the presidency until Dec. 31, 2025, with the option to extend these for a further two years. WHAT ABOUT MILEI’S PRESIDENTIAL DECREE?Markets cautiously welcomed a presidential decree from Milei last week to deregulate the economy, which came into effect on Dec.29 and also introduces wide-ranging reforms such as the end to export limits.That decree must go before a legislative commission to weigh its constitutionality. It will remain in force unless both Congress and the Senate vote it down. Unlike the reform bill, the presidential decree does not include changes to the tax and the electoral system, which must be put to congressional debate under Argentina’s constitution. HOW LONG COULD IT TAKE TO PASS THE REFORM BILL?Milei’s government sent the bill to Congress on Wednesday and has called for extraordinary sessions to fast-track its reform agenda.The extraordinary sessions are scheduled through Jan. 31, shortening the usual recess until March. Lawmakers will set up commissions to analyze the proposals, which may include input from experts and government officials. Several of the measures proposed require an absolute majority, such as electoral reform, which analysts warn could slow the process down. There is no set timeline stipulated for the bill to be debated. HOW STRONG IS THE GOVERNMENT’S POSITION IN CONGRESS?Milei’s coalition, La Libertad Avanza, controls only 15% of seats in the lower house, so must rally support to move forward. If eventually approved by the lower house, the bill moves to the Senate, where the government is even weaker, with less than 10% of seats. Given his lack of a strong party or a majority in either chamber, analysts warn that Milei faces an uphill battle to advance his reform agenda. “My doubt is whether Milei is open to accepting changes, or whether he wants the bill to pass without accepting any amendments,” said Ignacio Labaqui senior analyst at Medley Global Advisors in Buenos Aires. “If he goes for the second option, he is literally declaring war on the legislative branch and has a high chance of losing.” Opposition movements have organized demonstrations against Milei’s agenda in several cities since he took office Dec. 10. More

Hapag-Lloyd will continue to divert its vessels around the Suez Canal for security reasons, a spokesperson for the German container shipper said on Friday, adding a further assessment would be made on Jan. 2.Mitsui O.S.K. Lines and Nippon Yusen, Japan’s largest shipping companies, also said their vessels with links to Israel were avoiding the Red Sea area. Both companies said they were monitoring the situation.Shipping giants including Hapag-Lloyd and Denmark’s Maersk earlier this month stopped using Red Sea routes and the Suez Canal after Yemen’s Houthi militant group began targeting vessels, disrupting global trade.Instead, they rerouted ships around Africa via the Cape of Good Hope to avoid attacks, charging customers extra fees and adding days or weeks to the time it takes to transport goods from Asia to Europe and to the east coast of North America.The situation remains uncertain. Maersk is planning to sail almost all container vessels travelling between Asia and Europe through the Suez Canal from now on while diverting only a handful around Africa, a Reuters breakdown of the group’s schedule showed on Thursday.France’s CMA CGM is also increasing the number of vessels it has travelling through the Suez Canal, it said on Tuesday.CMA CGM is among container lines to have introduced surcharges due to the re-routing of vessels, adding to rising costs for sea transport since the Houthis started targeting vessels.Mediterranean Shipping Co’s container ship United VIII was attacked while transiting the Red Sea, it said on Tuesday. The Houthis also on Tuesday claimed to have fired missiles at the vessel, without saying it was struck.The Suez Canal is used by roughly one third of global container ship cargo, and re-directing ships around the southern tip of Africa is expected to cost up to $1 million extra in fuel for every round trip between Asia and Northern Europe. More