Global stock markets showed signs of strain on Monday, with Wall Street futures dipping lower as elevated government bond yields prompted investors to reconsider their positions. As the year draws to a close, concerns over stretched equity valuations and rising bond yields are casting a cloud over an otherwise strong year for regional markets.
The MSCI World Index, which tracks global stock performance, remained flat on the day but is still up 17% for the year, reflecting overall positive market sentiment in 2024. Trading volumes were thin, as investors began winding down ahead of the New Year holiday on Wednesday. European markets were particularly subdued, with the pan-European STOXX 600 index slipping 0.3% by midday, driven by losses in the technology and industrial goods sectors.
Concerns Over Bond Yields Impacting Equities
The driving force behind the market’s hesitation is the continued rise in government bond yields. Yields on U.S. 10-year Treasury bonds have surged to near eight-month highs of 4.585%, ending the year up about 70 basis points despite the Federal Reserve’s decision to lower interest rates by 100 basis points earlier in 2024. This divergence between bond yields and equities has sparked concern among investors, particularly as bond yields begin to compete with stock returns, challenging the attractiveness of equities.
“The continued rise in bond yields, driven by the reassessment of less restrictive monetary policy expectations, creates some concern,” said Quasar Elizundia, a research strategist at Pepperstone. “The possibility that the Fed may keep restrictive monetary policy for longer than expected could temper corporate earnings growth expectations for 2025, which could in turn influence investment decisions.”
The Impact on Global Markets
Across Asia, the effects of rising bond yields were felt, with Japan’s Nikkei index retreating from its five-month high after a strong rally earlier in the year. The Japanese index saw a small pullback as investors locked in profits, although it still remains up nearly 20% for 2024. South Korea’s main index saw a slight decline of 0.2%, weighed down by ongoing political uncertainty and a challenging economic environment.
Meanwhile, in China, the CSI300 Index of top Shanghai and Shenzhen stocks gained 0.5%, marking a near 16% increase for the year, with the majority of this gain coming in September after Beijing introduced new stimulus measures. However, Hong Kong’s Hang Seng Index dropped 0.2%, underscoring the global nature of the challenges facing markets.
The U.S. Dollar and Oil Market Trends
The strength of the U.S. dollar continued to play a significant role in market movements, gaining about 6% for the year against a basket of major currencies. On Monday, the dollar remained near a five-month high against the yen, holding steady at 157.52 yen, with traders wary of potential intervention from Japanese authorities to curb the currency’s weakness.
Commodity markets faced mixed fortunes, with oil prices experiencing modest gains. Brent crude rose 21 cents to $74.38 per barrel, while U.S. crude climbed 28 cents to $70.88 per barrel. However, oil prices struggled to make a strong recovery this year, weighed down by concerns over global demand, particularly from China, and the potential for a surge in U.S. supply in 2025.
Looking Ahead to 2025
As the year ends, the focus shifts to the prospects for 2025, with traders and analysts carefully monitoring bond yields, corporate earnings forecasts, and geopolitical developments. President-elect Donald Trump’s proposed economic policies, including tax cuts, are also expected to influence market sentiment in the early months of the new year. However, the widening interest rate differentials between the U.S. and other major economies, particularly the eurozone, are expected to keep the U.S. dollar in demand as 2025 begins.
While the global stock rally of 2024 has been strong, the final stretch of the year has seen investors pulling back, mindful of the pressures from higher bond yields and uncertain economic conditions. As 2025 approaches, the question remains: will stocks continue their climb, or will rising yields and tightening monetary policies lead to a period of correction? The coming months are likely to provide crucial answers to these questions.