Like every end of the year, it is time to take stock of the year and extract the lessons it has left us.
– The markets are wrong. At the beginning of the year, the markets were pricing in that both the Fed and the ECB would lower interest rates between 6 and 7 times, between 1.50% and 1.75%. Finally, in both cases the losses have been only four, or 1%. Once again, the markets are wrong in their forecasts.
– Long-term interest rates rise. Despite interest rate cuts by central banks, interest rates on 10-year sovereign bonds in countries such as France, Germany and the United States have risen. The increases have been 52 bp, 26 bp and 64 bp, respectively. The lowering of central bank rates is not enough to lower long-term rates.
– Central banks: stability before inflation. The reduction in inflation levels has been pronounced in 2024, but reaching the 2% target will be the most difficult section of the road. In any case, in the face of possible turbulence in the debt markets, central banks will continue to prioritize financial stability over achieving 2% in the inflation rate.
– Unsustainable US debt. Someone has to buy the growing US debt. The large holders of American public debt are foreign investors and the Fed. Both are reducing their relative position in American Treasury debt. Families and investment funds have been the big buyers in the last three years, but they will hardly be able to maintain this pace of purchases in the future. Directly or indirectly, the Fed will have to intervene again.
– The suicide of Germany and Europe. Faced with the energy trilemma between security of energy supply, energy affordability and environmental sustainability, Europe appears to prioritize environmental sustainability over security of supply and energy affordability. Germany, having voluntarily renounced nuclear energy and no longer counting on cheap Russian gas, is the biggest loser, with a level of industrial production 17% below 2017 levels. Without a change of direction in energy policy European Union it will be difficult to reverse the situation.
– Goodbye to the Peace Dividend. Since the end of the Cold War, the global economy, especially the European one, had benefited from the peace dividend, with the amounts dedicated to defense reducing from 4.2% of global GDP to less than 2%. Now, regardless of the duration of the war in Ukraine, defense spending will return to at least 3% of GDP, although Trump has already announced that he will require NATO members to reach 5%. What is dedicated to defense cannot be dedicated to other expenses or investments. Furthermore, the war economy is highly inflationary.
– Short-lived August crash. Every year the financial markets usually provide some purchasing opportunities. In August, the Japanese stock market fell 20% in just three days, causing declines of 10% in the main world stock markets. The market reaction showed the interconnectedness of the stock markets, the Bank of Japan’s (BoJ) rectification of its intention to further raise interest rates, and the level of liquidity and appetite for equities on global stock markets. In the United States and European stock markets, the buying opportunity lasted less than a week.
– The Japanese danger. Japanese public debt exceeds 250% of its GDP. The BoJ is the main buyer of the debt, controlling 57% of the total. The BoJ’s attempted interest rate hike may have considerable effects on global markets. Japan is the world’s largest net creditor. It maintains 3.3 billion dollars invested abroad. The Japanese danger is not so much the non-payment of its public debt, but the possible repatriation of a relevant part of the investments abroad, which would cause convulsions in the bond and stock markets of Western countries.
– Chinese fragilities. Faced with its internal real estate crisis, the weakness of private consumption and the fall in external investment to negative levels, China is exporting its overcapacity to the rest of the world, with numerous accusations of dumping, or selling products below cost or with strong state subsidies. As an example, in 2025 China will have the capacity to produce 36 million electric vehicles, while expected sales in its own territory are 15 million. There are more than 20 million vehicles left that will flood global markets at low prices. It is not the only sector. The EU has chosen an energy transition model that makes it dependent on China, both in the supply of processed minerals and in photovoltaic panels or lithium batteries. Trade tensions with China seem inevitable.
– Markets get used to almost everything. Despite all the uncertainties and risks experienced in 2024, the stock markets close a favorable year. Neither the prolongation of the war in Ukraine with an attack even within the Russian Federation, nor the extension of the war in the Middle East from Gaza, to Lebanon and Syria, nor the mutual attacks of Iran on Israel and of Israel on Iran, have been enough to derail a positive year in the stock markets.
Almost all of the points discussed are valid for the new year. Without a doubt, 2025 will be marked by the policy developed by the new Trump administration with global economic and financial implications.
Merry Christmas and happy new year. God willing.
#ten #lessons #markets #leave
