Global Asset Allocation Team Market Update – December 2023

Global stock markets soared higher on the back of the sharp retreat in global bond yields that propped up equity market valuations. The MSCI All Country World jumped 9.1%, with all major benchmarks we track posting exceptional results last month. The S&P 500 ended its three-month losing streak and advanced 9.1%, while the S&P/TSX rose 7.2%. Elsewhere, the MSCI EAFE gained 9.1%, while the MSCI gauge of emerging market stocks jumped 7.9%. 

Fixed income markets also had a stellar month. Bond yields tumbled lower as speculation for a dovish policy pivot grew in response to signs of slowing growth and cooling inflation. Notably in the US, bond traders have doubled-down on wagers that the Federal Reserve is done its rate hike campaign and will start cutting rates in the first half of 2024, even after Chair Powell reiterated that its premature to speculate on easing and stated that officials are prepared to tighten further if necessary. Still, markets brushed-off these remarks and are pricing-in more than 50% odds of a rate cut in March and are fully pricing a rate cut in May. After hitting a 16-year high of 5%, the 10-year treasury yield fell by 60 basis points to 4.33%, while the 2-year treasury yield slid by 41 basis points to 4.68%. In Canada, the 10-year government bond yield declined by 51 basis points to 3.55%, while the 2-year yield fell by 44 basis points to 4.19%. For the month, the Barclays US Aggregate Bond Index rose 4.5%, while the FTSE Canada Bond Universe gained 4.3%. 

The US dollar (DXY) depreciated by 3% in its biggest monthly drop in a year as investors ratcheted-up wagers for rate cuts by the middle of 2024. The greenback was weaker against all of its major trading peers, with the Canadian dollar (+2.3%), euro (+3.0%), pound (+3.9%), and yen (+2.3%) all strengthening last month. 

Finally, crude oil bucked the risk-on trend and fell for a second straight month amid signs of swelling supplies from non-OPEC+ producers, with the US reporting that output hit a record high – while the premium generated by the Israel-Hamas war has also faded. By contrast, gold rallied strongly and hit a six-month high on the back of a decline in treasury yields that boosted the appeal of the non-interest bearing metal, while the weaker US dollar also buttressed the yellow metal. 

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