Global financial markets have shown mixed performance as 2024 draws to a close, with several key factors influencing investor sentiment. Despite a generally positive year for many regional markets, there is growing concern about the rising bond yields and their potential impact on the equity market. As the year concludes, government bond yields are approaching eight-month highs, and investors are beginning to withdraw from equities as they reassess the economic outlook for 2025.

The MSCI World Index, which tracks a broad spectrum of global shares, remained steady on Monday, maintaining an overall increase of 17% for the year. However, trading volumes were relatively low as investors anticipated the New Year holiday and a shorter trading week. Many stock markets, including those in Germany, Italy, and Switzerland, are closed for extended periods, while others, such as the UK and France, are only holding partial trading sessions. This reduction in market activity contributed to a subdued trading environment as the year ended.

European stocks faced a modest decline, with the pan-European STOXX 600 index dropping by 0.3% by midday. This downturn was driven by underperformance in the technology and industrial goods sectors. Investors have been cautious about the future, especially with upcoming economic reports on manufacturing activity from both China and the United States, which are expected to offer more clarity on global economic conditions.

In Asia, markets reflected a blend of optimism and challenges. South Korea’s main stock index fell by 0.2%, marking a disappointing year with losses of nearly 9%. The political instability in South Korea has weighed heavily on its market, and recent news regarding a fatal crash involving South Korean budget carrier Jeju Air further dampened investor confidence. In contrast, China’s blue-chip CSI300 index rose 0.5% and ended the year up nearly 16%, largely thanks to government promises of more economic stimulus measures, which fueled a rally in the country’s stock market in the final quarter. However, Hong Kong’s Hang Seng index slipped 0.2% on the day, reflecting some caution in the region.

Japan’s Nikkei stock index also retreated in the final trading session of 2024, after hitting a five-month high earlier in the week. The Nikkei had posted a robust 20% gain for the year, but investors locked in profits as the year came to a close, wary of potential risks ahead. Meanwhile, futures for U.S. stocks showed signs of weakness, with the S&P 500 and Nasdaq futures both dipping by around 0.5% and 0.6%, respectively, following a sell-off on the last trading day of the week.

One of the most significant challenges facing investors is the rise in government bond yields. The yield on 10-year U.S. Treasury bonds is nearing an eight-month high of 4.585%, representing a significant increase of about 70 basis points from the start of the year. This rise in yields reflects a shift in expectations about the Federal Reserve’s future monetary policy, with concerns mounting that the central bank may maintain a restrictive stance for longer than previously anticipated. As bond yields rise, they compete with equities for investor capital, especially when the returns from bonds become more attractive relative to stocks.

The impact of these rising yields is not limited to fixed-income markets. The potential for sustained higher rates has raised concerns about the future growth of corporate earnings, which could influence investment decisions moving into 2025. Research strategist Quasar Elizundia from broker Pepperstone highlighted the potential for corporate earnings growth to slow, which could temper investor enthusiasm for equities in the upcoming year. These concerns are compounded by the possibility of rising supply in the bond market, particularly if U.S. fiscal policies under President-elect Donald Trump lead to increased budget deficits.

The strength of the U.S. dollar has been another key factor affecting global markets. Driven by widening interest rate differentials between the U.S. and other major economies, the dollar has gained roughly 6% against a basket of major currencies this year. The euro has fallen over 5% against the dollar in 2024, and the dollar remains near a five-month high against the Japanese yen. This dollar strength has had an adverse effect on gold prices, although the precious metal is still up 27% for the year.

In the commodities market, oil prices have struggled in 2024. Concerns about weaker demand from China, the world’s largest oil importer, combined with expectations of increased supply from the U.S., have kept oil prices subdued. Despite this, oil prices have shown some resilience, with Brent crude rising by 21 cents to $74.38 per barrel and U.S. crude gaining 28 cents to $70.88 per barrel on Monday. These price movements reflect ongoing supply concerns and OPEC+’s efforts to limit production to maintain stability in the market.

As the year concludes, market participants are preparing for a range of challenges in 2025. Rising bond yields, political uncertainty, and the evolving global economic landscape are all factors that investors will need to navigate carefully in the coming year. The U.S. Federal Reserve’s future actions, U.S. fiscal policy under the new administration, and ongoing geopolitical tensions will all play a critical role in shaping the financial markets. Investors will need to remain cautious and flexible, as global markets face an uncertain road ahead in 2025.

(Adapted from Reuters.com)

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