December proved to be a brutal month for markets, both in what are termed ‘risk assets’ (such as equities) and ‘risk-free’ assets (such as government-backed securities, like US Treasuries or UK Gilts).

Markets, and in particular bond markets, reacted to the ‘hawkish cut’ of 25 basis points (0.25%) from the Federal Reserve in the US which was accompanied by commentary significantly lowering expectations for further rate cuts during 2025. 

Bond yields were already rising (i.e. prices were sagging – the ‘yield’ on a bond or Gilt moves inversely in relation to its price) but the recent US jobs report has further cooled rate-easing predictions with the effect of pushing US 10-year yields out to 4.8% and 30-year to nearly 5%, levels not seen since 1998. While the S&P 500 registered another all-time high in early December, bond market volatility soon spilled over into equity markets and the index posted a 2% loss on the month. In currencies, often sensitive to political events, the US dollar continues to strengthen across the board, taking sterling’s crown as the strongest G10 currency; the dollar is currently nearing a 5-year high against the Chinese Yuan and parity with the Euro.

European markets didn’t fare much better despite a cut by the ECB and expectations of further cuts throughout 2025. 10-year German Bund yields rose to more than 2.5%. Overall though, European stock indices saw healthy gains in 2024, apart from France’s CAC 40 amid political turmoil. Germany’s DAX rose 19% despite economic contraction and political instability, largely thanks to their own ‘Magnificent Seven’ stocks, such as software giant, SAP, up more than 70%. While SAP benefited from the market’s huge appetite for any stock involved in AI, the rise was represented across sectors with such as Siemens (energy), Rheinmetall (defence), Deutsche Telekom and insurers Allianz and Munich Re knocking the automotive giants like Volkswagen and Mercedes-Benz off their old predominant perch. Dax constituents derive less than a quarter of their earnings from inside Germany. 

In the UK, interest rates were kept on hold by the Bank of England as inflation ticked up again. The Bank is heading for a difficult period as the word ‘stagflation’ rears its ugly head (the fatal combination of slowing economic growth combined with rising prices – a term first coined by Iain Macleod in 1965 when Conservative Shadow Chancellor and a predominant concern throughout the 1970s). The new Government practically ensured the UK economy saw no growth in Q3 and data so far indicates a contraction in Q4. Post-budget business (and personal) confidence has taken a battering. 

The Gilt market, especially the long end, remains a worry as the Government’s spending plans entail plenty of new issuance. The 30-year Gilt yield has long since eclipsed the Truss/Kwarteng mini-budget highs to print at 5.45%, a level not seen since 2002 and more recently, the 10-year has touched 4.9%. In equities, the FTSE had a weak month but remains in the trading range we have endured since June last year. Fingers crossed that the valuation gap between UK assets and those in the US/Europe soon corrects in a positive way… 

2025 looks to be a tricky and potentially volatile year as the return of the Tariff Man, the rise in energy prices and geo-political uncertainties dominate the news.
 

Any views or opinions expressed in this piece are those of the author and not necessarily representative of Church House.

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