Review of the Global Market in 2024: Strong U.S. Stocks, Pressure on Government Bonds, and a Strong Dollar Pressuring Emerging Market Currencies

At the beginning of this year, investors expected the upward momentum of global stock markets to weaken, with rapid interest rate cuts in the United States boosting U.S. Treasury bonds and weakening the dollar, while emerging market currencies would strengthen. However, the reality has been completely opposite. Despite the impacts of the Middle East and Russia-Ukraine wars, political turmoil in several major countries, and economic slowdowns, global stock markets are still expected to rise by 16% for the second consecutive year. Additionally, under the resonance of multiple factors, U.S. Treasury yields have risen, the dollar has strengthened, and emerging market currencies are under pressure along with global government bonds.

U.S. Stocks Are Terrifyingly Strong

Firstly, the Chinese stock market has experienced a volatile year. After the Chinese government announced plans to introduce stimulus policies, it surged nearly 16% in a single week in September, followed by several weeks of pullback. Overall, investors holding Chinese stocks achieved an annual return of 16.5% in 2024.

The rise in global stock markets is largely attributed to the significant increase in the U.S. stock market for the second consecutive year, with the AI boom and strong economic growth attracting more global capital into U.S. assets, pushing the dollar up 6.6% against other currencies in 2024. After Donald Trump won the election on November 5, the sentiment of prosperity in the U.S. rose, as traders focused on the elected president's tax cuts and deregulation plans, with the surge in animal spirits driving the annual increase of the cryptocurrency Bitcoin to 122%.

As we enter 2025, global markets will increasingly be influenced by U.S. trends, a risk factor that emerged this month after the Federal Reserve's comments hinted at fewer interest rate cuts in the coming year, disrupting the market. Prior to this, weak U.S. employment data and Japan's unexpected rate hike in mid-year put pressure on dollar-denominated assets, causing significant volatility in global markets due to the unwinding of yen carry trades, leading to a brief downturn in August.

Meanwhile, bond investors are increasingly concerned that Trump's proposed trade tariffs could exacerbate inflation and that excessive borrowing by the White House could disrupt the $28 trillion U.S. Treasury market, leading to broader chaos in government bonds.

Moreover, if the U.S. economy enters a recession, the likelihood of a rebound in international markets is generally low. Barclays Private Bank's Chief Market Strategist Julien Lafargue stated, "If the (U.S.) stock market pulls back, investors will find it difficult to find a safe haven."

The S&P 500 index has accumulated a 24% increase this year, following a similar rise last year, marking the strongest two-year gain since 1998. The stock price of AI chip manufacturer Nvidia (NVDA.US) rose 178% in 2024, while Tesla's (TSLA.US) stock price increased by 68%, and investor exposure to the U.S. stock market reached record levels in December.

According to Schroders, the total market capitalization of the so-called "Magnificent Seven" U.S. tech giants accounts for about one-fifth of the MSCI global index. If their earnings or AI technology prospects disappoint, it will raise the level of market threat The US Dollar is Also Strong

The euro has fallen about 5.7% against the US dollar this year, and the performance of European stock markets relative to US stock markets is the worst in at least 25 years. After four interest rate cuts by the European Central Bank, the pace of economic decline in the eurozone has slowed, with some forecasters predicting a rebound in the European economy by 2025.

Secondly, concerns over US tariffs and the strengthening dollar have particularly severely impacted emerging market currencies, exacerbating their struggles. The currencies of Egypt and Nigeria have depreciated by about 70% against the dollar, while the Brazilian real has depreciated by more than 27% due to heightened concerns over government debt and spending.

A few moderate annual currency appreciations include the Malaysian ringgit rising by 2.8%. Among the best-performing currencies, the South African rand and the Hong Kong dollar rose by 2% and 0.5%, respectively, while the Israeli shekel is expected to decline by 1.5% this year.

Arif Joshi, co-head of emerging market debt at Lazard Asset Management, stated: "We remain cautious on emerging market currencies, primarily due to Trump's trade war."

As major central banks around the world strive to find other diversified reserves and reduce reliance on dollar assets, gold has risen 26% in 2024.

Bonds Bulls Frustrated

Interest rates have declined across major economies this year, but bond investors have suffered annual losses as inflation has remained more stubborn than expected, with bond investors digesting more monetary easing policies ultimately implemented by major central banks for most of 2024.

The yield on the US 10-year Treasury bond rose nearly 70 basis points in 2024, the UK 10-year Treasury yield surged by 107 basis points, and the German 10-year Treasury yield increased by 33 basis points. In Japan, due to accelerating inflation, the country's interest rates were raised twice this year, with the yield on the 10-year Japanese government bond rising by 47 basis points, marking the largest annual increase since 2003.

The bond market will face challenges next year, with uncertainty over how Trump's policies will affect the Federal Reserve. Last month's debt crisis in France also indicated that so-called bond vigilantes are ready to punish governments that overborrow.

Surprising Winners

Bond investors' returns in 2024 come from some of the riskiest markets. As investors expect the Middle East conflict to weaken the armed group Hezbollah, Lebanon's defaulted dollar bonds have yielded about 100% for the year. An ambitious reform plan and the prospect of Donald Trump's return to the White House have driven dollar bonds issued by Argentina to achieve a 100% return, with Argentine leader Javier Milei closely linked to the elected U.S. president. Fueled by bets that Trump may end the Russia-Ukraine war, Ukrainian bonds have yielded over 60%.