December 2014

• Global markets experienced heightened volatility in December 2014 as collapsing oil prices, geopolitical tensions and concerns over global growth unsettled investors before a year-end recovery.
• The United States remained comparatively resilient, with the Federal Reserve adopting a cautiously optimistic tone while preparing markets for eventual interest rate increases in 2015.
• Japan continued to benefit from aggressive monetary stimulus and a weaker yen, while Europe relied increasingly on expectations of large-scale quantitative easing by the European Central Bank.
• Emerging markets were pressured by declining commodity prices and significant stress in energy-exporting economies, particularly Russia.
• Crude oil prices fell sharply once again as oversupply and OPEC's unchanged production policy continued to weigh heavily on the energy sector.
• Government bond yields declined across major developed markets as investors sought safety amid heightened uncertainty.

Asia (ex. Japan)

Asian markets outside Japan posted mixed returns during December as investors balanced concerns over weaker global demand with supportive policy measures in China. Chinese authorities continued to signal a willingness to ease monetary conditions, and expectations for additional stimulus helped sustain strong momentum in domestic equities. The Shanghai Composite ended the year at its highest level in several years.

Elsewhere in the region, lower oil prices provided a meaningful benefit to energy-importing economies such as India, South Korea and Thailand. Inflation pressures eased across much of Asia, giving central banks greater flexibility to support growth if needed. Nevertheless, export-oriented markets remained sensitive to the strengthening U.S. dollar and uncertainty surrounding global economic conditions.

Europe

European equities were volatile but generally ended the month higher as investors increasingly anticipated sovereign bond purchases by the European Central Bank. Economic growth remained subdued and inflation continued to drift toward zero, reinforcing the case for more aggressive monetary intervention in early 2015.

Political developments in Greece also attracted significant attention after the failure to elect a president triggered a snap general election scheduled for January. Peripheral bond markets remained relatively stable despite these concerns, supported by expectations that the ECB would soon launch a comprehensive quantitative easing programme.

United States

U.S. equity markets experienced sharp swings during December but finished the year on a strong note. The Federal Reserve removed its asset purchase programme from active policy and stated that it could remain patient in beginning interest rate increases, which reassured investors that monetary tightening would be gradual.

Economic data remained encouraging, with strong employment growth, improving consumer confidence and increased household spending. Lower energy prices continued to support real incomes and consumption. Treasury yields declined modestly as inflation expectations fell and investors sought high-quality assets during periods of market stress.

United Kingdom

UK markets were mixed during December as falling oil prices supported consumers but weighed heavily on the energy sector, which represented a significant portion of the equity market. Inflation continued to moderate, reducing pressure on the Bank of England to tighten monetary policy.

Economic growth remained solid, underpinned by strong employment and consumer spending. Sterling weakened against the U.S. dollar as expectations for rate increases were pushed further into 2015. Gilt yields declined in line with global trends as lower inflation and international risk aversion boosted demand for government bonds.

Japan

Japanese equities ended the year positively, supported by the Bank of Japan's expanded monetary stimulus and continued yen depreciation. The weaker currency improved earnings prospects for exporters, while domestic institutional investors increased allocations to equities as part of broader pension reforms.

Prime Minister Shinzo Abe's decisive election victory in December reinforced confidence in the continuation of Abenomics. The renewed mandate strengthened expectations that aggressive fiscal and monetary measures would remain in place to combat deflation and stimulate long-term economic growth.

Emerging Markets

Emerging markets faced significant challenges in December as lower commodity prices and a stronger U.S. dollar intensified pressure on vulnerable economies. Russia was the focal point of investor concern, with the rouble experiencing a dramatic collapse amid falling oil revenues and economic sanctions.

Commodity-importing countries such as India and parts of Asia were better positioned, benefiting from lower energy costs and improved inflation trends. Nonetheless, capital outflows and heightened risk aversion weighed on broader emerging market sentiment as investors favoured developed market assets.

Commodities

Commodity markets continued to weaken, led by another steep decline in crude oil prices. Brent crude fell below $60 per barrel as global oversupply, resilient U.S. shale production and OPEC's decision to maintain output exerted sustained downward pressure on prices.

Gold prices were relatively stable but remained constrained by the stronger U.S. dollar and improving confidence in the American economy. Industrial metals softened amid concerns over Chinese demand, while agricultural commodities produced mixed results depending on harvest conditions and regional weather patterns.