As we close out December and look toward the year ahead, December proved to be a month of contrasting market dynamics. While volatility remained a central theme, the US and European markets experienced differing trends, setting the stage for the broader opportunities we anticipate in 2025.
Equity Markets: Divergence Between Europe and the US
Equity markets in December showed a notable divergence between Europe and the US. The EuroStoxx 50® Total Return ended the month up +1.94%, while the S&P 500® Total Return finished down -2.38%. This contrast highlighted differing regional market conditions. The VStoxx® index, which tracks implied volatility in Europe, remained flat, closing at 17.0%, while the iTraxx Crossover® (S39) widened slightly from 298 to 313bps.
This divergence in equity markets and volatility measures reflects varying investor sentiment and economic dynamics between the regions, creating opportunities in both markets as we head into 2025.
On the risk arbitrage front, December saw the completion of key mergers and acquisitions, along with narrowing spreads in several deals, helping drive the performance of risk arbitrage strategies across the board. The European banking sector in particular has seen increased volatility as corporate activity has begun to pick up, providing additional opportunities for tactical trading.
Volatility Markets: A Tale of Two Regions
December’s volatility landscape displayed a marked divergence between the US and Europe. Early in the month, volatility was relatively subdued, with both the US (VIX®) and European (Vstoxx®) indices showing low levels. However, the Federal Reserve’s mid-month meeting triggered a brief spike in US volatility, as Chairman Powell’s unexpectedly hawkish comments led to a repricing of short-term volatility. Despite this increased volatility, market activity remained generally muted due to low liquidity.
These market conditions presented both challenges and opportunities, particularly in the volatility space, where we saw temporary fluctuations alongside an overall backdrop of lower-than-usual trading activity.
The US market faced challenges as 5-year Treasury yields rose and spreads on high-yield credit widened, contributing to a broad decline in valuations. Meanwhile, the crypto-related convertible bonds segment experienced a sharp sell-off due to difficulties in securing leverage. We expect these difficulties to iron out as the new year progresses.
Credit Markets: Atos Restructuring and Market Developments
In the credit space, key events such as Atos’ successful financial restructuring drew attention in Europe. The company completed the final steps of its Accelerated Safeguard Plan, significantly reducing debt and strengthening its liquidity position. More broadly, yields on USD HY and Euro HY remain significantly lower than the levels seen at the beginning of the year.
Macro: A Mixed Month
The Federal Reserve meeting brought volatility to the markets, with gold and equity markets reacting more negatively than anticipated. As we look to 2025, we remain focused on macroeconomic factors such as US-China tensions, global deglobalisation trends, and the broader impact of fiscal and liquidity conditions on global markets. With a new incoming US administration, we anticipate further volatility.
Looking Ahead: 2025 and Beyond
As we enter 2025, our focus remains on closely monitoring liquidity, fiscal policies, and global macro trends. We expect the US to continue driving structural changes under the new administration, and we anticipate that these changes will present new opportunities in the market.
The European capital market landscape looks poised for a much-anticipated revival in merger and acquisition activity. With key elections on the horizon, shifting central bank policy, and geopolitical repositioning providing opportunities for market participants.
Risk Warning
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