Market index returns

Week to date since December 04, 2024 as of December 11, 2024

Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.

Market commentary: 

Global equities fell in our review period, after hitting an all-time high on December 6th. Commodity Futures was the only sector in Real Assets with positive performance for the period as prices for cocoa and natural gas rose. In geopolitics, the war in Ukraine continued to grind on while pressure for a negotiated settlement rose ahead of Trump’s return to the U.S. presidency. In a dramatic turn of events, rebels in Syria took advantage of Russia and Iran’s distractions to embark on a lightning two-week take down of the Assad regime. The opposition quickly moved to stabilize government functions and assure the global community of their intentions to build an inclusive state for the Syrian people. The U.S. struck ISIS targets in the aftermath, while Israel took the opportunity to seize control of a buffer zone in Southern Syria, hitting weapons caches and military facilities throughout the country to prevent the flow of rockets and chemical weapons to the black market. Should Syria form a functional government and return to the global economy, it could provide some regional stability as millions of refugees could return from Turkey. The country also offers a potential route for Middle East gas pipelines to reach Europe. Equity market volatility, as measured by the VIX index, was relatively unchanged in the period. Inflation break-evens rose marginally during the week, moving up 4 basis point (bps) for the 5-year and 5bps for the 10-year. The price of gold also rose $86 to $2,718 per ounce, while oil prices rose $2 per barrel to $70.29. The U.S. dollar strengthened against the major currencies and credit spreads tightened by 4bps to 102bps for BBB-rated credits and by 11bps to 280bps for sub-investment grade corporate credit.^[1]

Against this backdrop, Real Assets trailed global equities this week. Global Infrastructure securities led the decline for the week after outpacing other liquid real assets year to date (YTD). Global Real Estate securities dropped less than Global Infrastructure securities, while Natural Resource Equities and U.S. TIPS (Treasury Inflation-Protected Securities) lost the least. Within Global Real Estate securities, the Americas Hotels and Hong Kong Investor segments were the only positive areas. Within Global Infrastructure securities, companies in Asia ex-Japan, Australia, and the Latin American airport segment posted positive performance while Americas Communication companies led the decline. Precious, Bulk, and Base Metals & Mining companies led Natural Resource Equities for the week; however, their rise was not enough to offset weakness in the Energy and Agriculture segments. Commodity futures saw Cocoa, Natural Gas, Coffee, and Corn lead the way while Aluminum, Hogs, Nickel, and Cotton lost the most.^[1] 

Why it matters: The changes in Syria could increase or decrease regional stability, which in turn could impact global energy markets and trade. Capital markets continue to look for signals from the upcoming U.S. administration to optimize portfolios accordingly. To the extent that “people are policy,” nominations for the Secretary of State, Treasury, and SEC appear to be competent as well as supportive of Trump’s “America First” policies. Tariffs remain high on the wall of worry and will most likely fall somewhere in between an all-out trade war and a less-impactful threatening cudgel to achieve other goals, but the devil will be in the details as they say.  

Macro Dive: This week, we review a variety of inflation metrics, weekly jobs data, and a roundup of central bank activity.  

• Inflation Alphabet: Following last week’s release of PCE (personal consumption expenditure) data, the Bureau of Labor Statistics released CPI (consumer price index) data for November. Month-over-month (MoM) CPI was 0.3% for both headline and core (ex-food & energy) inflation. Year-over-year (YoY) inflation was 2.7% for headline and 3.3% for core. All of this data came in at expectations and reinforced the moderation trend that PCE also reflected. Combined with recent jobs data, the market views it as likely that the Fed has enough room to cut interest rates another 25bps at its December meeting. However, the extent of cuts in 2025 and the terminal rate itself are less certain as progress on inflation appears to have slowed: PPI (producer price index) for November rose 0.4% (headline MoM), above estimates of 0.2%, and 3.0% YoY, ahead of estimates of 2.6%. Core PPI data typically leads core CPI data by roughly a year, signaling the potential for further inflation pressure in 2025. Real average hourly earnings YoY also came in at 1.3%, a touch below the prior month’s reading of 1.4%. 3rd quarter unit labor costs came in lower than expected at 0.8% vs. 1.3%, while nonfarm productivity matched expectations at 2.2%.^[2] 
• State of Employment: Initial jobless claims in the U.S. came in at 242k for the week ending December 7th, which was ahead of expectations of 220k. Continuing claims also came in at 1,886k, ahead of expectations of 1,877k. Permanent job losers (a slightly harsh title by the BLS) reached 1.9 million at the end of November and we continue to watch for a leveling off of this data to signal a turn in the job market. The permanent number hit 3.7 million during COVID before falling to a 5-year low in September 2022. This key figure has climbed since then. Employment income is required for consumer spending, a main driver of U.S. GDP. Data on employment and inflation, the pillars of the Fed’s dual mandate, provides insight into the path and terminal point for interest rates, which contributes to monetary conditions for businesses and consumers.^[3]
• Ease up: The European Central Bank (ECB) cut rates for the third consecutive meeting. The ECB’s Governing Council lowered rates 25bps to 3%, matching expectations, and totaling 100bps for the cycle. Inflation for Europe was 2.3% at the last reading; weakening economic growth, where dangers remain tilted to the downside, could fade inflation below the ECB’s 2% target. The Swiss National Bank (SNB) surprised markets with an outsized 50bps cut to 0.5%. The market was expecting a reduction of only 25bps as the SNB works to ease strength in the Swiss franc. This was the fourth consecutive reduction for the bank, bringing rates to levels last seen in September 2022 as they ended eight years of below-zero monetary policy. Both central banks cited risks to downside growth and inflation as the global economy, and the prospect of export growth (primarily to Asia), remained lackluster. The Bank of Canada also cut rates by 50bps to 3.25%, which brought cumulative cuts to 175bps, one of the most aggressive paces of cuts for advanced economies. The market is also expecting the U.S. Federal Reserve’s FOMC to reduce interest rates by 25bps to 4.25% at its next meeting on December 18th. Policy leadership in Beijing has also signaled that it could also ease monetary conditions and support 2025 growth with fiscal policy measures.^[1]

Real Assets, Real Insights: We’ll first look at a recent report from our DWS private market counterparts regarding their global real estate outlook. Then we will continue discussing our theme of data center energy demand. Finally, we will look at lithium production in Argentina.  

• Looking ahead (Real Estate): Our DWS peers  in private real estate released their Real Estate Strategic Outlooks for the U.S., Europe, and Asia Pacific. To summarize, in the U.S., real estate prices have stabilized, and fundamentals strengthened; in Europe, limited new supply, strong rent growth and compression of yields could provide an opportunity; and in Asia, asset repricing could offer an attractive entry point, supported by “healthy fundamentals and easing monetary conditions.” The full reports can be accessed here: U.S. / Europe / Asia Pacific.  
• Data Centers go off-grid (Infrastructure): Exxon, the largest oil company in the U.S., is working on a natural gas plant to supply electricity directly to data centers. There are a few key differences that stand out in this venture. The first is the planned usage of carbon capture technology that will capture an estimated 90% of the carbon emissions produced by the generation. Exxon already operates three electric plants to supply energy to its own operations, as well as operating carbon capture pipelines to bury the emissions. While government tax credits will not fully offset the costly carbon mitigation, technology companies are willing and able to pay a premium for lower emission, reliable power. The expected timeline for the project is five years, much less than other nuclear projects recently announced. Contributing to the shorter timeline is the plan to leave the plant unconnected from the broader grid, which shortens the approval timeframe.^[1]
• A lithium lift for Milei (Commodities): Argentina’s libertarian President Javier Milei’s investment incentives (tax, currency, and trade benefits) aided Rio Tinto Group’s decision to invest $2.5 billion in a new lithium production. The company is planning to begin work on the new lithium mine next year as the company looks to make lithium a cornerstone of its portfolio. The decision came despite a drop in lithium prices and plans by other miners to slow their expansions. Rio also purchased a U.S. lithium miner in October and is looking to enter projects in Chile and develop a lithium mine in Serbia. Argentina is one of the fastest growing lithium producers and companies are also looking to develop copper opportunities in the country.^[1]