December 15 (Reuters) – The Christmas rally should be confirmed on the stock markets at the end of the year, with operators “buying” many assets with the signal given on Wednesday by the American Federal Reserve (Fed), which indicated that its key rates had likely peaked, paving the way for lower borrowing costs in 2024.
On the other hand, the Bank of Japan (BoJ) could begin the opposite path, by hinting next Tuesday at the end of its ultra-accommodating monetary policy.
Uncertainties over the BoJ’s long-term decisions, combined, among others, with Thursday’s announcements from the European Central Bank (ECB) and the Bank of England (BoE), which have tempered expectations of an imminent decline in rates, however, show that the path to 2024 could be strewn with pitfalls.
Overview of the market outlook in the coming days:
1/ROLE REVERSAL
Speculation is growing that the Bank of Japan will soon abandon its negative interest rate policy, which is the reverse of that of most major central banks, at a time when the market is lending to the Fed and other monetary institutions intend to now focus on lowering borrowing costs.
Such a decision will probably not be taken on Tuesday, during the BoJ’s monetary policy meeting, according to a Reuters survey of economists. The Japanese central bank could, however, use this meeting to prepare the ground for a change in its policy at its January meeting.
This expected pivot from the BoJ and the prospect of an easing of Fed policy pushed the yen to 141 per dollar, for the first time since July.
The financial fraud scandal, which led Japanese Prime Minister Fumio Kishida to carry out a ministerial reshuffle on Thursday, notably by getting rid of the political leaders most favorable to an expansionist policy, could also contribute to accelerating the end of the ultra-accommodating program of the BOJ.
A reversal of the trend on the yen could improve Fumio Kishida’s popularity rating but a sudden acceleration could also be detrimental for the economy.
The Nikkei is still lagging behind most other major stock indices since the start of the month.
2. DECLINE IN INFLATION IN THE USA?
Investors hope that the PCE price index in the United States, a measure of inflation favored by the Fed, scheduled for publication next Friday, will show an easing of pressure on consumer prices.
On Wednesday, Fed Chairman Jerome Powell deemed it appropriate to question the timing of a rate cut.
The US consumer confidence index due next Friday, as investors seek to gauge the impact of interest rates on spending, will also be one to watch.
A key market theme heading into 2024 will be whether the Fed has managed to ensure a “soft landing” for the US economy.
3/ GOLD SHINES
Gold is heading towards its first annual increase since 2020, thanks to a depreciation of the dollar and the prospect of a reduction in interest rates in 2024 against a backdrop of declining inflation.
The yellow metal, which does not come with an interest-linked return, tends to perform better in an environment of falling real rates, that is to say those adjusted for inflation.
U.S. 10-year real rates have been rising steadily since the start of 2022, but they only turned positive in June. They are currently at their highest level in eight years, but that has not stopped gold from surpassing $2,000 per ounce. However, the price of gold still remains 20% below its historical record adjusted for inflation, at more than 2,500 dollars, reached in 1980.
The expected cut in Fed rates next year combined with rising political and economic uncertainties could allow gold to experience a good period in 2024.
4/ THE SPECIFICITY OF BRITISH INFLATION
Monthly UK inflation figures, which are still more than double the Bank of England’s (BoE) 2% target, will be published on Wednesday. They could confirm that price pressures in the UK remain high compared to other major economies.
Sterling rose to a three-month high against the euro this month after euro zone inflation fell sharply, fueling speculation that the BoE will take longer than the ECB to reduce its rates.
By keeping its rates unchanged for longer than the ECB, the BoE could, however, push the British economy into recession, while stagnation is already expected in 2024.
Maintaining the strength of the pound sterling is therefore not without consequences and the BoE will have to determine whether it continues to react to current inflation trends or whether it takes a longer-term bet on the weakness of the economy. will slow down wage and price growth.
5/AT THE BOTTOM OF THE NILE
Egyptian President Abdel Fattah al-Sisi is expected to win a third term as head of the country on Sunday amid a weak opposition, but he will face an impressive list of challenges.
The war in the Gaza Strip, bordering Egypt, is raging while the country of the pyramids is grappling with an economic crisis fueled by near-record inflation and high borrowings which are weighing down debt service, the repayment of which represents nearly half of state revenue.
Economists believe that this situation is untenable. At least $42.26 billion will be due in 2024, including $4.89 billion to the International Monetary Fund (IMF).
The first measure taken after the elections should be a further devaluation of the Egyptian currency. The pound has already been halved against the dollar since March 2022. One dollar is now worth around 49 Egyptian pounds on the black market, compared to an official rate of 31 pounds. The currency futures markets say the same thing.
(Writing by Lewis Krauskopf in New York, Kevin Buckland in Tokyo, Naomi Rovnick, Marc Jones and Amanda Cooper in London; compiled by Amanda Cooper; graphics by Pasit Kongkunakornkul, Prinz Magtulis and Vineet Sachdev; French version Claude Chendjou, edited by Blandine Hénault )
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