It was a mixed week in global financial markets as the market continued to assess the likelihood of a hard or soft landing next year and the implication for inflation and interest. Or maybe there is just a lot of money sloshing around.

The US market was fairly choppy, with a late-week bounce led by mega-cap technology stocks leaving the market higher for the sixth week in a row. Earlier declines were driven by concerns over valuation and concentration risk, with the so-called Magnificent 7 stocks that are seen to be AI beneficiaries now accounting for over 30% of the S&P 500. While this level of index concentration might seem quite normal to Australians it is extreme for the US market, and it is causing many advisers and investors to reassess the appropriateness of purely market capitalisation based benchmarks.

Ultimately though, the tech-heavy Nasdaq gained 1.4%, the core industrial-focused Dow was flat and the S&P 500 was up almost 1%, having been down a percent or so midweek. Gains were concentrated in Apple, Alphabet, Amazon, chip maker AMD, and other AI/mega-cap favourites, while Microsoft gave back some of its gains and was the biggest negative contributor along with Novo Nordisk, the maker of one of the Glucagon-Like Peptide-1 Receptor Agonists. These so-called ’fat drugs’ have been taking the healthcare world by storm and represent the other main investment theme for 2023.  

European stocks and global small companies – where valuations are less demanding – led the way up 3% and 2% respectively, with Europe reaching its highest level since April, as markets seem to be welcoming signs of peaking inflation (especially in Europe) that could allow central banks to ease policy tightening. Well, that’s what equity markets are assuming anyway. Longer-dated bond yields fell over the week, on mounting conviction that key central banks are entering the final stages of policy tightening amid evidence of slowing global growth and moderating price pressures. Central banks (especially the RBA) still beg to differ.

Australian equities moved higher over the week, with the S&P/ASX 300 Index gaining 1.5%. Strength in the Resources sector supported gains, with major miners BHP, Rio Tinto and Fortescue Metals up a few percent despite falling commodity prices. Both Woodside Energy and Santos were down a few percent as oil prices were down sharply, despite a merger proposal between the two entities hitting the headlines late in the week. Local bank prices also firmed a few percent.  The pullback in bond yields also supported interest rate-sensitive sectors like Real Estate and Utilities.

Most industrial commodity prices were down along with oil and gas while precious metals advanced. WTI crude dropped 7.5% to near $74/barrel on global demand worries. Iron ore held above $120/tonne while gold rallied above $1,800/oz.

In currency markets, the US dollar index fell 0.4% as foreign exchange markets continued adjusting expectations for Fed policy. The Australian dollar ended little changed despite terms of trade data revealing record export earnings, while the yen rallied 4% as speculation mounts that the Bank of Japan will review its yield curve control policy. The Japanese equity market liked this development less and was down almost 4% for the week.

Looking ahead to next week, all eyes will be on critical US jobs data that will be coming out overnight and will provide a gauge of the health of the economy and future Fed policy moves. However, given the weakness in commodities and the downwards pressure on rates we are tending towards the Hunt Economics view that Fed sponsored liquidity has been driving this end of year rally despite weakening economic fundamentals.