The geopolitical situation in the Middle East is heating up again. Asia’s growth outlook outperformed the Eurozone

By JustMarkets

At Friday’s stock market close, the Dow Jones (US30) index decreased by 0.06% (for the week +0.91%, for the year +13.74%), while the S&P500 (US500) index was down 0.28% (for the week +0.33%, for the year +24.73%) on Friday. The NASDAQ Technology Index (US100) closed negative on 0.56% on Friday (for the week +0.03%, for the year +44.52%).

Hawkish comments from former US Treasury Secretary L. Summers on Friday lent support to the dollar when he said “..there’s not going to be as much room for the Fed to ease as people are hoping.” Indeed, while there is a sense of optimism about the US inflation outlook in the second half of 2023 following encouraging CPI and Core PCE reports, it is premature to declare victory. Any pause in or reversal of the underlying trend in consumer prices next year could be a disaster for sentiment, leading to a revision of interest rate expectations to a hawkish approach. The Fed’s dovish stance is a clear signal that officials want to change policy in time to ensure a soft landing; in other words, they favor growth over inflation. However, the vector could shift in the dollar’s favor by the end of the first quarter if additional data becomes available to better assess the macroeconomic picture. Any acceleration in growth would boost employment and labor market rigidity, putting upward pressure on wages. In such an environment, inflation could be well above the 2.0% target, while maintaining an upward trend.

Equity markets in Europe were mostly up on Friday. The German DAX (DE40) rose by 0.30% (for the week +0.51%, for the year +19.07%), the French CAC 40 (FR40) gained 0.11% on Friday (for the week -0.18%, for the year +14.38%), the Spanish IBEX 35 (ES35) added 0. 16% (for the week +0.36%, for the year +20.70%), the British FTSE 100 (UK100) closed positive on the last day of last year on 0.14% (week ended +0.23%, for the year +2.37%).

According to the European Commission’s forecast, Germany’s GDP will contract by 0.4% in 2023, while France and Italy will grow by 1% and 0.9% respectively. At the moment, analysts are forecasting lower inflation and eurozone GDP growth for 2024 in the range of 1-1.3% y/y, which is higher than the current year. The first half of next year is likely to be challenging, with high-interest rates and global geopolitical instability limiting the outlook for the EU economy.

Crude oil gave up early gains on Friday and suffered minor losses as weaker-than-expected economic news from the US added to concerns about energy demand. Rising Russian oil exports are weighing on crude prices. Vortexa tanker tracking data monitored by Bloomberg shows that the four-week average of refined product shipments from Russia rose to 2.6 million bpd in the four weeks through December 24, up 157,000 bpd from the previous week and the highest in seven months.

The geopolitical situation in the Middle East is heating up. At least twenty-six merchant ships have been attacked or approached in Yemen by Iran-backed Houthi militants in the Red Sea since Israel’s war with Hamas began in October. In addition, fears that the war between Israel and Hamas could spill over into the wider Middle East are helping to push oil prices higher after the US military struck three sites in Iraq on Monday targeting an Iranian-backed terrorist group blamed for a series of drone attacks on US troops.

supportive factors were the Bank of Japan’s soft stance and optimism about the Indian economy. On the other hand, Chinese blue-chip stocks performed the worst in the region as lingering concerns over the country’s economic recovery led investors to pull out of local markets.

The Japanese index JP225 was the top performer in 2023. Japanese equities were supported by improving corporate results as well as growing optimism that the Bank of Japan may finally end its ultra-easy monetary policy after decades of near-zero interest rates. On the other hand, Hong Kong’s Hang Seng Index (HK50) was the worst-performing major index in the region, having declined for four consecutive years. The fall in the FTSE China A50 (CHA50) also indicates that China’s economic recovery is not going well. The Chinese economy has been hampered by a slump in real estate prices and local government debt problems, which has affected spending and reduced demand and investment in the manufacturing sector. Despite this, economists believe that the outlook for Asia remains bright as Asia continues to enjoy strong growth, especially in India. Their view is supported by the International Monetary Fund, which expects Asia to grow by 4.6% in 2023 and 4.2% in 2024, compared to the global growth forecast of 3% in 2023 and 2.9% in 2024.

The Singapore dollar has outperformed all of its Asian peers over the past two years. The Central Bank’s chance to take the lead in the region for the third consecutive year remains in the central bank’s sights. The currency gained 1.5% in 2023 as the Monetary Authority of Singapore (MAS) maintained its policy range with a bias toward rate hikes at its April and October meetings to counter inflation. Economists predict the MAS will maintain this regime again this year, with some even expecting further policy tightening if inflation proves intractable.

S&P 500 (US500) 4,769.83 −13.52 (−0.28%)

Dow Jones (US30) 37,689.54 −20.56 (−0.06%)

DAX (DE40)  16,751.64 +50.09 (+0.30%)

FTSE 100 (UK100) 7,733.24 +10.50 (+0.14%)

USD Index  101.38 +0.05 (+0.05%)

• – US Richmond Manufacturing Index (m/m) at 17:00 (GMT+2).
• – Caixin Manufacturing PMI (m/m) at 03:45 (GMT+2);
• – Germany Manufacturing PMI (m/m) at 10:55 (GMT+2);
• – German Unemployment Rate (m/m) at 10:55 (GMT+2);
• – Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+2);
• – UK Manufacturing PMI (m/m) at 11:30 (GMT+2);
• – Canada Manufacturing PMI (m/m) at 16:30 (GMT+2);
• – US Manufacturing PMI (m/m) at 16:45 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.