Financial Newsletter , December 9 , 2024

1. United States: Positive Correlations Between Rates and Equities

Morgan Stanley highlights that the positive correlation between Treasury yields and S&P 500 performance underscores strong macroeconomic fundamentals. Cyclical sectors, such as energy and financials, exhibit a significant positive correlation with rising yields, while defensive sectors like utilities and healthcare tend to outperform during declining yields. However, 10-year yields above 4.5% might weigh on equity multiples, particularly for growth stocks. December seasonality remains strong, with median S&P 500 returns of +1.5% and a notable uptick for small caps, where the Russell 2000 historically gains +2.7% in the latter half of the month【9?source】【10?source】.

2. Europe: Political Uncertainty and Economic Defense Tools

The EU is bracing for potential economic coercion under Trump’s second term, including possible new tariffs on European exports. Instruments such as the Anti-Coercion Instrument (ACI) and Foreign Subsidies Regulation (FSR) aim to shield European firms and promote global market reciprocity. The ACI, for instance, allows for swift countermeasures against economic pressures. Internally, the EU is bolstering its resilience with enhanced industrial policy coordination and accelerating its energy transition, a critical priority for 2025【13?source】.

3. China: Monetary Stimuli and Trade Pressures

China has introduced innovative mechanisms to lower bank funding costs and align monetary policies to support growth, vital amid a global demand slowdown. The recent expansion of the M1 definition is a strategic move to encourage credit and liquidity in the banking system. However, U.S. tariff uncertainty compels Chinese firms to seek alternative markets, as exports to the U.S. continue to shrink. Analysts expect China’s GDP growth target for 2025 to remain around 5%, supported by fiscal and monetary stimulus. The manufacturing sector, particularly hit by reduced exports, may benefit from government incentives for reshoring and advanced production transitions【11?source】.

4. South Korea: Political Transition and Market Stability

Following a brief martial law declaration and the failed impeachment motion against President Yoon, South Korea is navigating a critical political transition. The government focuses on macroeconomic stability, managing foreign reserves of $490 billion. Measures include enhanced bond stabilization funds (KRW 40 trillion) and equity stabilization funds (KRW 10 trillion) to support markets under stress. Additionally, the "Value-Up" program continues to drive strategic investments in technology and manufacturing sectors, crucial for future economic growth. Upcoming presidential elections may shape industrial and fiscal policies with significant implications for economic stability【12?source】.

5. Technical Analysis: Opportunities in Rates and FX

• 2-Year UST: Following a double top at 4.38%, yields have stabilized around 4.24%, but a breach could lead to a decline towards key support at 4.00%. The short-term outlook is moderately bearish.
• EUR/USD: An inverse head-and-shoulders pattern suggests upside potential targeting 1.0860. However, breaking resistance at 1.0635 is crucial for confirming the bullish trend. A retreat below 1.0460 could invalidate this outlook and drive the pair back toward recent lows【10?source】.

Summary:

• Moderate “animal spirits” in the U.S., focusing on rates and December seasonality.
• Europe’s resilience amidst new geopolitical pressures, with strengthened industrial strategies.
• China’s monetary policies poised to sustain growth despite trade challenges.
• South Korea’s macroeconomic stability agenda emphasizes strategic investments.

Sources

• Morgan Stanley, “Weekly Warm-Up: Focus Is on Rates, Consumer and December Seasonality”【9?source】.
• SocGen, “Technical Analysis”【10?source】.
• Goldman Sachs, “China: Three Things in China”【11?source】.
• Goldman Sachs, “Korea Views: Aftermath of a Brief Martial Law Episode”【12?source】.
• Natixis, “Between Normalisation and (Geo)Political Risks”【13?source】.