Shares dip to cap stellar year; Treasuries end volatile 2023 flat

World shares ticked down on the last trading day of the year but were headed for their biggest annual rise since 2019, while US Treasuries were set to finish the year broadly where they started after some wild moves for the benchmark in 2023.

Shares around the world have risen sharply in the last two months of the year, as benchmark bond yields fell on expectations of central bank rate cuts early in 2023.

The SP 500 closed on Thursday just 0.3 per cent shy of its record closing high, reached on January 3, 2022. On Friday, the SP 500 lost 0.48 per cent, the Dow Jones Industrial Average fell 0.27 per cent, and the Nasdaq Composite dropped 0.84 per cent.

"With New Year’s and record-high territory quickly approaching, investors have the champagne on ice going into the holiday weekend," Adam Turnquist, Chief Technical Strategist for LPL Financial, said in an email. "While extremely overbought conditions raise the odds of a temporary pause or pullback, longer-term returns have been positive and above average based on comparable periods."

The SP 500 is up about 24 per cent this year thanks to a massive rally in megacap tech stocks, while Europe's STOXX 600, currently around a 23-month peak, is heading for a nearly 13 per cent yearly gain, and MSCI's world share index a 20 per cent gain, its most in four years.. All rallied sharply in November and December.

"We have eaten a lot of the returns that were expected in 2024. The positive momentum in markets is obviously associated with the fall in yields, and so now the question is how long can this trend continue?" said Samy Chaar, chief economist at Lombard Odier.

Chaar said that future returns "are probably more moderate" than they were at the beginning of November, but if long term U.S. interest rates settle around 3.5 or 4 per cent, there is "little danger of a big U-turn" and continued corporate profits might add "a few percent of upside."

The benchmark 10-year Treasury yield was 3.855 per cent, up 0.5 basis points on the day, and remarkably right around its level at the start of the year.

That yearly performance masks some major swings, as the note's yield reached 5.021 per cent in October, its highest since 2007, before retreating and driving the share rally.

Behind the move lower in yields has been a sustained decline in inflation around the world that has driven expectations that central banks will cut interest rates early next year. The U.S. economy has remained strong feeding hopes for a "soft landing".

Markets are pricing in a 88% chance of the U.S. Federal Reserve starting rate cuts in March, according to CME FedWatch tool, up sharply from a 35% chance at the end of November. Traders are also pricing in over 150 basis points of easing next year by the Fed, the European Central Bank, and the Bank of England.

Spanish inflation was a rare piece of economic data during the quiet period between Christmas and New Year. The country's European Union-harmonised 12-month inflation was unchanged from November at 3.3%, though below the 3.4% expected by analysts polled by Reuters.

CHINESE UNDERPERFORMANCE

Chinese markets have underperformed, despite optimism at the start of the year when Beijing ended its zero-COVID policy.

Both Hong Kong's Hang Seng Index and China's onshore bluechip index lost more than 10% in the year on waning investors confidence in the world's second largest economy.

Those losses compare to the Nasdaq, which powered 44 per cent higher in 2023, and Japan's Nikkei 225 Index, which gained 28 per cent.

In the currency market, the dollar was little changed and headed for a 2 per cent decline this year after two years of strong gains, with declines mirroring the fall in US yields.

Against a basket of currencies, the dollar was last at 101.22, edging away from the five month low of 100.61 it touched on Wednesday.

In commodities, Chicago wheat and corn futures were set for the biggest annual drop in a decade as easing supply bottlenecks in the Black Sea region and higher production weighed on prices.

Oil prices were due to end 2023 down 10 per cent after a year of wild swings driven by geopolitical concerns, production cuts and global measures to rein in inflation.

On Friday, US crude rose 0.54 per cent to $72.16 per barrel and Brent was at $77.58, up 0.56 per cent on the day.

Gold prices rose a touch on Friday and were poised to end their best year since 2020. Spot gold added 0.1 per cent to $2,066.79 an ounce.