European and Asian Markets Diverge, Investors Keep Rate-cut Hopes Alive

Barry Adams
15 Jan, 2024
New York City

World markets closed mixed in Monday's trading, and the U.S. financial markets were closed for Martin Luther King's Day.

Market indexes in Tokyo continued to advance on the hopes that the Bank of Japan would keep its monetary stimulus intact despite the recent rise in inflation, but markets in China struggled after the People's Bank of China did not announce any economic stimulus measures while keeping the medium-term rates steady.

Asian markets have diverged over the last fifteen months, with the market indexes in India and Japan surging ahead, but the indexes in China continued to drift lower, extending losses for the fourth year in a row.

In Europe, market indexes struggled to advance after the German economy contracted in 2023 and eurozone industrial activities declined for the third month in a row.

German consumers are facing dual headwinds of rising interest rates and elevated inflation, and businesses are struggling with elevated input costs and weak domestic and external demands.

The eurozone economy is expected to struggle in 2024 amid weak consumer demand and high interest rates.

Moreover, the European Central Bank is likely to keep interest rates higher for longer in its efforts to bring down inflation to 2% while keeping the unemployment rate low and avoiding a full-blown recession.

 

European Markets Closed Down After Choppy Trading

European markets were on the defensive in Monday's trading, and investors reviewed the economic data from Germany and the eurozone.

Benchmark indexes in Frankfurt, Paris, and London declined about 0.3% after Germany's economy contracted in 2023 and wholesale prices fell at a slower pace in December.

Market indexes in Europe are expected to trade in a tight range, and the financial markets are closed on Martin Luther King Day.

In Asia, the Nikkei extended gains by 0.9% to 35,901.79, and the benchmark indexes traded at a new 34-year high on the expectation that the Bank of Japan is not likely to end its ultra-loose monetary policy soon.

Market indexes in Hong Kong and the mainland China declined after the People's Bank of China held its one-year medium-term loan rate at 2.5%, dashing hopes of an unexpected rate cut.

Markets in India inched higher into record territory after investors reacted to positive earnings from domestic corporations, and retail inflation stayed within the range preferred by the Reserve Bank of India.

 

German Economy Stalled In 2023

The German economy adjusted for inflation and fell by 0.3% in 2023, following a revised 1.8% expansion in 2022, the Federal Statistics Office, or Destatis, reported Monday.

The largest economy in the region faced multiple headwinds as consumers and businesses battled high inflation and rising interest rates, and weak external demand kept export activity growth in check.

Industrial output declined 2%, largely because of weaker production in the energy supply sector; manufacturing output fell 0.4% due to the ongoing weakness in vehicle manufacturing; and construction activities rose 0.2% despite high building costs and elevated interest rates.

Germany's economy at the end of 2023 was larger by 0.7% from its level in 2019, the year before the onset of the pandemic, when the economy plunged 3.8%.

Most service sectors expanded their economic activities in 2023, but economic growth slowed from the previous year.

On the demand side, private consumption adjusted for price declined 0.8%, investment fell 0.3%, and government spending dropped 1.7%, the first decline in 20 years after the government withdrew medical care provided during the coronavirus pandemic era between 2000 and 2022.

 

German Wholesale Prices Decline Extended to Ninth Month

Germany's wholesale price declined 2.6% from a year ago in December, Destatis said in a separate report released Monday.

The wholesale price declined, slowed from 3.6% in the previous month, and fell for the ninth month in a row.

On a monthly basis, prices fell 0.3% in December after falling at a 0.2% monthly rate in November.

 

Eurozone Activities Contracted Third Consecutive Month in November

Elsewhere in the region, eurozone industrial activities declined by 0.3% in November, Eurostat reported Monday.

Industrial activities declined for the third month in a row after durable consumer goods output declined at a faster pace of 2.0% compared to 1.0% in October.

The production of non-durable consumer goods output rose 1.2%, matching the same pace in October.

The industrial activities shrank by 6.8% from a year ago and extended the contraction for the ninth month in a row.

 

Europe Indexes and Yields

The DAX index decreased 0.5% to 16,626.08, the CAC-40 index fell 0.7% to 7,414.33, and the FTSE 100 index inched lower by 0.4% to 7,594.91.

The yield on 10-year German bonds edged up to 2.18%; French bonds inched higher to 2.71%; the UK gilts held steady at 3.80%; and Italian bonds increased to 3.78%.

The euro edged lower to $1.093, the British pound inched lower to $1.271, and the U.S. dollar eased to 85.44 Swiss cents.

Brent crude advanced $0.15 to $78.12 a barrel, and the Dutch TTF natural gas increased by €2.05 to €29.95 per MWh.

 

Taiwan Stocks Advance After DPP Wins Presidential Election

In Asia, Tokyo stock markets hovered near a 34-year high, and the Taiwan Weighted Index advanced 0.4% after the ruling Democratic Progressive Party won the presidential election for the third consecutive time.

William Lai Ching-te won the presidential election on Saturday by winning 40%, or 5.59 million votes, but neither of the three contesting parties won an outright majority in the Legislative Yuan or the governing parliament.

The DPP lost its majority in the 113-member legislative body to 51 seats from 61, and the rival KMT increased its tally by 14 to 52 seats.

Elsewhere in the region, the Hang Seng Index decreased 0.6% to 16,190.59 and the CSI 300 index dropped 0.2% to 3,278.51 after the People's Bank of China held its rates  steady and dashed the hopes of a surprise rate cut.

The central bank held its one-year policy rate on medium-term lending facilities at 2.5%, and the central bank injected 216 billion yuan into the financial system via the facility.

Logan Group in Hong Kong traded up 5.5% to HK$0.63 after the struggling developer pledged to cut its total debt load by $3 billion and speed up its debt repayment plan.

Some key creditors agreed to the company's plan to repay offshore debt and a shareholder loan of $8 billion through cash and new securities over a nine-year period.

In Tokyo, the Nikkei index increased 1% to 35,930.42, and in Seoul trading, the KOSPI index declined 0.2% to 35,930.42.

Tech stocks led the gainers in Tokyo trading on the receding hopes of a rate cut by the U.S. Federal Reserve.

 

India Stocks Advanced On Earnings Optimism, Retail Inflation Accelerated

Stocks in Mumbai looked up after a week of volatile trading amid rising tensions in the Red Sea, and investors reviewed the latest update on inflation and industrial production data.

Consumer price inflation in December accelerated to 5.69%, following 5.55% in October, the statistical agency reported late Friday.

The rise in inflation was driven by elevated food prices following unseasonal rain in several parts of the nation, disrupting food supplies.

Despite the rise, inflation still stayed within the 2%–6% range preferred by the Reserve Bank.

Industrial production plunged to an increase of 2.4% in November from the revised 11.6% rise in October, the statistical agency announced in a separate report on Friday.

The growth in activities in manufacturing, mining, and electricity generation dropped sharply in the month.

The growth in manufacturing activities plunged to 1.2% from 6.7%, mining slowed to 6.8% from 9.7%, and electricity declined to 5.8% from 12.7% in the month a year ago.

 

India Indexes and Yields

The Sensex index increased 759.49 points to 73,327.94, and the Nifty index rose 202.95 points to 22,097.45.

On the Mumbai stock exchange, 459 stocks traded at their 52-week highs and 12 stocks traded at their 52-week lows.

The yield on the 10-year Indian government bonds edged up 7.17%, and the Indian rupee edged lower to ₹82.83 against the U.S. dollar.

The gold price increased by 0.4% to ₹62,591 per ten grams, and silver rose by 0.4% to ₹72,770 per kilo.

Crude oil increased by 0.2% to ₹6,204 per barrel, and natural gas fell by 0.7% to ₹263.60 per thermal unit.