December is usually a sweet month for the stock market. As the end of the year approaches, managers accelerate portfolio rotations to achieve greater profitability. After the rally that stock markets will accumulate in 2024, with gains of around 30% on Wall Street and exceeding 15% in Europe, any shock can accelerate profit-taking and subsequent declines in shares. But it is clear that for investors everything that does not have to do with the flexibility of monetary policy is secondary. Confidence that rates will continue to fall serves as a counterpoint to geopolitics.In a week in which the fall of the French government and the declaration of martial law in South Korea dominated the headlines,stock markets continued with indices such as the Spanish one which set 15-year highs and the American and German who reconfirmed the records.
Analysts point out that the market can do anything. Ramón Forcada, director of analysis and markets at Bankinter, believes that a small correction would be healthy because the more stock markets continue to rise in the last stretch of the year, the smaller the path they will leave for 2025, especially in the first months. In the coming sessions, monetary policy meetings, the US inflation report and negotiations in France to form a new government and finalize the 2025 budgets will onc again test investors’ patience. These are the keys to the week on the markets:
Monetary policy
Up to five central banks will meet in the next few days,but the one that will have the greatest effect on European markets will be the ECB. The consensus expects a new 25 basis point cut to be announced, the fourth as the rate cut process began in June. But more than this decision,which has already been priced in,what the market is waiting for is to know the organization’s projections for the coming quarters and clues on the next steps to follow. The economic weakness of the eurozone, notably that of countries such as France and Germany, once synonymous with stability, has led traders to discount rate cuts in each of the events until the price of money has been placed at 2%. Macro-performance analysts hope that the message conveyed by the president of the institution is cautious. “The stagnation of the inflation rate around 2.7% in recent months will not allow the ECB to send a complacent message. Another factor that strongly limits the risk of a particularly expansive message is the accumulated depreciation of the euro against the dollar since last September. A weak euro makes it tough to reduce inflation,” the company emphasizes.
Ivan San Félix, analyst at Renta 4, believes that the ECB will wait to see what real impact Trump’s protectionist threats will have on the economy. If the new governance decides to increase tariffs, this would be a serious blow to an economy like Europe’s which is showing signs of weakness while the chances of more resilient inflation increase. if these expectations were confirmed, the ECB would find itself in a more complicated situation. “which should decide whether to support economic growth or,on the contrary,focus on the objective of controlling inflation”,they underline. According to what operators have expected, this time Lagarde will give priority to growth.
Unlike in the past, when peripheral countries were the headache for investors, the weakness is now concentrated in some of the region’s largest economies. German industrial production, one of the engines of the region’s economy, began the last quarter with an unexpected decline and is frustrating hopes of being able to emerge from the crisis. Germany has had six quarters of low growth and the outlook for 2025 is only getting worse. Previously, GDP was expected to increase by 0.4-0.8% and now by 0.1%, not to say it will contract again. Despite this, Forcada believes that the market is too optimistic and, although he expects rates to continue to fall, they will do so more moderately and with less intensity than expected.
American inflation
One day before knowing the ECB’s verdict, data on American inflation will be published. The consensus is that the overall rate will rise by a tenth, to 2.7%, and that the underlying rate, which excludes the price of fresh food and energy, will remain unchanged. unchanged at 3.3%. The resistance that prices show to falling to 2%, combined with the strength of the labour market (227,000 jobs were created in November, more than the 200,000 expected by economists), impose extreme caution on the Federal Reserve. The market expects it to cut rates again by 25 basis points in the last meeting of the year, but questions 2025 cuts. Chances of not touching rates in January reach 63% compared to 58% in a week Before. Bankinter predicts that next year the Fed will cut the price of money by 100 basis points to reach the 3.5-3.75% range. “It is important that this week’s inflation does not surprise negatively,” Forcada emphasizes.
France
On Friday, the president of the republic, Emmanuel Macron, began a series of contacts with the various parties to form a government whose first task will be to prepare budgets that bring the deficit back to 5%. They have until December 21st for approval. If that doesn’t happen, the 2024 accounts would be extended, which investors see as a failure. With a deficit that will exceed 6% at the end of the year and a debt that reaches 112% of GDP, the neighboring country must make great efforts to achieve the desired fiscal stability. After the punishment that the French heritage has suffered as Macron called the legislative elections in June, in the last part of the week the stock market and the debt stopped bleeding.With the 10-year bond at 2.87%, the risk premium, understood as the rate differential between France and Germany, was reduced to 77 basis points, 11 points less than the 88 recorded on the day the Left bloc and Marie Le Pen’s far right presented two motions of censure.
Despite the collapse of the Barnier summit, the Cac 40, the reference index of the French stock market, closed the week with a rise of 2.65%. This recovery is not enough to scare the red numbers. The French selective index loses 1.54% in 2024 and is heading towards the worst year compared to the rest of the European indices since 2010. Analysts believe that the recovery of the last few sessions is something temporary as the market had already priced in the political crisis. This, added to the closure of bearish trades (investors profiting from stock market declines) led to the comeback. Rating agencies have already taken France by the ear and warn that public finances are out of control. Analysts expect volatility to remain high and while some see the recent declines as an opportunity to enter at attractive prices, others believe it is too early to increase exposure.
what are the key factors that could influence stock market performance in December?
Interview: Navigating the Markets in December – insights from an Expert
Editor: Welcome too our special feature today.We’re thrilled to have Ramón Forcada, the Director of Analysis and Markets at Bankinter, with us to discuss the current state of the stock market as we head into December and beyond. Ramón, thank you for joining us.
Forcada: Thank you for having me. It’s a pleasure to be here.
Editor: December is often seen as a strong month for stock markets,but this year seems especially unique. With projections suggesting gains of around 30% in the U.S. and over 15% in Europe for 2024, what’s your take on the driving forces behind this optimism?
Forcada: Absolutely, December usually brings a certain sweetness to investors. The end of the year often prompts portfolio rotations aimed at locking in profits. Though, while many are excited about the projected gains for 2024, we have to remember that markets can be unpredictable. Any unforeseen shock could quickly trigger profit-taking and thus declines in stock prices.
Editor: Speaking of shocks, how do geopolitical events, such as the recent turmoil in France and South Korea, influence investor sentiment, particularly in this context?
Forcada: That’s a great question.Geopolitical events can create uncertainty, but right now, many investors are looking primarily at monetary policy. Confidence that interest rates will continue to decline supports market stability, even in the face of political upheavals. it seems maintaining a flexible monetary policy is a priority for most investors.
Editor: you mentioned that you believe a minor correction in the market would be healthy. could you elaborate on why that’s the case?
Forcada: Sure! The reason I advocate for a small correction is that if markets continue to rise sharply in December, it could limit their potential in the early months of 2025. A bit of a pullback would help readjust expectations and set a stronger foundation for future growth without excessive overheating.
Editor: That makes sense. Now, with monetary policy being such a pivotal focus, what are your thoughts on the upcoming meetings of the central banks? Specifically, how do you anticipate the European Central Bank (ECB) will respond in light of recent economic indicators?
Forcada: The ECB’s upcoming meeting is indeed crucial. I expect they’ll announce a further 25 basis point cut, as that has been heavily anticipated. However, what the market is really looking for is insight into the ECB’s projections for future quarters. Given the stagnation in inflation around 2.7% and the euro’s depreciation against the dollar,any overly complacent message could be problematic.
Editor: So, in your view, the ECB has a delicate balancing act to perform?
Forcada: exactly. They need to navigate between supporting economic growth and managing inflation effectively. the reality is that if inflation starts moving upward amid economic weakness—especially with any potential tariffs stemming from protectionist policies—then the ECB could find itself in a tight spot.
Editor: It sounds like a lot rides on the decisions made by both central banks and policymakers in the coming weeks. As we wrap up,what would your advice be to investors as they approach this volatile climate?
Forcada: My advice would be to remain informed and cautious. Investors should keep a close eye on the monetary policy announcements and global economic indicators. Diverse portfolios can mitigate risk, and a willingness to adapt to changing conditions is crucial in these unpredictable times.
Editor: Wise words, Ramón.Thank you so much for sharing your insights with us today. As the year wraps up, we’ll certainly be paying close attention to these developments in the market.
Forcada: Thank you for having me. It’s been great to discuss these crucial issues with you.