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Market Update

December caps a strong year for equities

Global equities ended 2017 on a high note as markets continued to take their cue from strong economic growth and low inflation – a so-called ‘Goldilocks’ combination. The US and UK benchmark indices set fresh record highs during the month.

Markets took further support from the agreement of a US$1.5 trillion cut in US taxes, including a substantial reduction in corporate tax rates, on 22 December. The US Federal Reserve (Fed) raised its main interest rate by 0.25 percentage points, but longer-term interest rates barely moved as investors seemed to remain convinced inflation remains under control.

In December, global equity markets – captured in the MSCI World Index – rose 1.6%.1 In the UK, the FTSE 100 Index rose 4.9%, while the more domestically oriented FTSE 250 Index also outperformed the global benchmark, gaining 3.9%, as market participants shrugged off weak jobs and growth data and a rise in inflation that was above the Bank of England’s target.

The strong rally came on the back of increased confidence that the UK would avoid an economically disruptive ‘hard Brexit’ after the UK and the EU reached agreement on ‘phase one’ of the UK’s withdrawal negotiations, on 9 December.

The FTSE 100 was further boosted by a decline in the value of the pound (which boosts the sterling value of companies’ foreign-currency earnings).

Emerging-market (EM) stocks also outperformed, rising 3.4% during December in sterling terms, supported by strengthening commodity prices as well as the buoyant global growth outlook.

European stocks underperformed, with the benchmark EURO STOXX 50 Index weakening 1.1% over the month in sterling terms. The strong euro may have hampered European equity prices. Italian stocks in particular underperformed, possibly reflecting mounting political concerns ahead of elections in March 2018. The US S&P 500 Index rose 1.1% in sterling terms.

A quiet month for fixed income

Tame inflation helped keep interest rates low despite the Fed’s hike. Yields on 10-year government bonds were unchanged over the month in the US and dipped 0.13% in the UK. Yields on German bonds rose modestly, while yields on Italian bonds rose by 0.28%, perhaps on rising political worries. Spanish yields rose by 0.1% despite a renewed victory for pro-independence parties in Catalonia’s regional elections on 21 December.

The favourable global growth outlook proved a constructive backdrop for commodity prices. Crude oil rose 5% over the month, to US$66.7 per barrel for Brent Crude, the highest price since December 2014. Production curbs by leading producers, declining stocks, and renewed tension between the US and Iran – that increased concerns over a possible re-imposition of US sanctions on Iranian oil exports – further lifted oil prices. Metals prices also rose – copper was up 5.9%.

Property broadly shared in the positive conditions in December. The ABI UK property index rose 1.3%, outpacing the 1.1% rise in the global index. UK property securities rose 5.6%, outperforming the UK equity market (FTSE 100 Index).


The key question facing markets heading into 2018 is how long the current ‘Goldilocks’ environment can persist. Strength in commodity prices may point to some price increases in future. Concerns over rising inflation led to sell off in US government bonds. A resurgence of inflation would risk a sharper rise in interest rates than investors currently expect, which could spark broader market volatility.


  1. Equity and property indices sources from Financial Express, all other financial and economic data from Macrobond