December saw a continuation of many 2013 market trends, with developed market equities outperforming emerging market equities, weakness in the Australian Dollar, Japanese Yen, and emerging market currencies, a continuing selloff in precious metals and agricultural commodities, rising US Treasury yields, and tighter US investment grade and high yield credit spreads. The long awaited tapering by the Federal Reserve was finally announced on December 18 with a $10 billion reduction in monthly asset purchases to a pace of $75 billion. A revised 3rd quarter US GDP growth estimate to 4.1% and a drop in the US employment rate to 7% boosted confidence that US markets could absorb the reduction in quantitative easing.
Notable corporate deals announced in December included Sysco Corporation’s $3.5 billion acquisition of US Foods, AerCap’s $5.4 billion acquisition of AIG’s aircraft leasing business, Avago’s $6.6 billion purchase of LSI Corp., Frontier Communications’ $2 billion purchase of AT&T’s Connecticut landline business, Harland Clarke’s $1.8 billion acquisition of Valassis Communications, Essex Property’s $4.3 billion purchaser of BRE Properties, and Textron’s $1.4 billion deal to acquire Beechcraft Corp.
Developed market equity markets rose in December (see page 6), led by Japan (+3.5%), the US S&P 500 (+2.5%), and Canada (+2%). US small caps underperformed with the Russell 2000 up 2% (see page 3); in 2013 the Russell 2000 outperformed the S&P500 by 6.4% (38.8% vs 32.4%). Materials (+4.8%) and Industrials (+4.3%) were the best performing US sectors (see page 2), while Telecom (-0.3%) and Consumer Staples (+0.6%) were the worst performing; in 2013 Telecom was the worst performing sector (+11.5%), while Consumer Discretionary was the best performing sector (+43.1%). Large cap growth (+2.9%) outperformed large cap value (+2.5%) in December (see page 3). Emerging Market equities were mixed in December (see page 7), with the biggest gains in Malaysia (+3.1%), India (+2.3%), and Taiwan (+2.1%) and the biggest declines in Argentina (-8.1%), Thailand (-5.6%), and the Philippines (-5.2%); in 2013 Argentina (+66%) was the best performing emerging market, while Thailand (-8.3%) was the worst performing.
In currencies, the USD Index fell 0.8% in December (see page 8). Weakness was seen against the USD in the Japanese Yen (-2.7%) and Australian Dollar (-2.1%), while strength was seen in the Swedish Krona (+1.6%), Swiss Franc (+1.5%), and British Pound (+1.2%). The USD was mixed against emerging market currencies with gains in the Indian Rupee (+1%), Russian Ruble (+0.7%), and Chinese Yuan (+0.6%) and losses in the Turkish Lira (-6%), Indonesian Rupiah (-3.4%), and Thai Baht (-1.9%).
US Treasuries sold off in December except at the very short end of the curve (see page 10). 10 year rates closed the year at 3.03%, up from 2.74% at November month end and 1.76% at year end 2012. Investment grade and high yield US credit spreads tightened in December to 2013 lows (see page 11). European sovereign spreads were mostly tighter in December, with Ireland closing the month at multi year lows (see page 12).
In commodities, the GSCI index closed up 1.9% in December (see page 9), led by gains in Industrial Metals (+4%) and Energy (+3.2%); losses were seen in Precious Metals (-3.8%), Agriculture (-3.5%), and Livestock (-1.5%). Within individual commodities, Natural Gas led gains (+7.1%), followed by Cotton (+6.7%), Crude Oil (+5.9%), and Copper (+4.5%); Wheat was the weakest performer (-9.5%), followed by Lean Hogs (-5.7%), Sugar (-4.3%), and Gold (-3.8%).
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