Markets that started the year with predictions of a global stock rally losing steam, swift U.S. interest rate cuts boosting Treasuries, and a weaker dollar strengthening emerging market currencies have defied expectations, Reuters reported.

Global equities are on track to post a second straight annual gain of over 17%, showing resilience despite challenges such as wars in the Middle East and Ukraine, Germany's economic contraction and government turmoil, French budgetary issues, and China's economic slowdown.

This performance has been largely driven by another year of significant gains in Wall Street stocks, fuelled by the artificial intelligence boom and robust U.S. economic growth. These factors have attracted increased global capital to U.S. assets, pushing the dollar up by 7% against other major currencies in 2024.

Trump's Win Boosts Market Optimism

Optimism in U.S. markets surged following Donald Trump's election victory on November 5, as traders zeroed in on the President-elect's promises of tax cuts and deregulation. This wave of confidence also fueled a 128% annual gain for cryptocurrency bitcoin.As the world approaches 2025, global markets are increasingly tied to U.S. economic trends, a growing risk highlighted by the Federal Reserve's recent announcement of fewer rate cuts for the upcoming year.

This shift rattled markets earlier this month, following weak U.S. jobs data and an unexpected midyear rate hike from Japan, which put pressure on dollar-denominated assets, triggered a spike in volatility, and caused a brief market sell-off in August.

Debt markets are also showing signs of unease, with investors wary of Trump's proposed trade tariffs potentially stoking inflation. Concerns are mounting over the administration's high borrowing levels, which could disrupt the $28 trillion Treasury market and lead to broader instability in government bonds.

Wall Street Leads the Charge

Wall Street's S&P 500 index has climbed 24% this year, building on a similar rise last year to achieve its strongest two-year performance since 1998. In 2024, shares of artificial intelligence chipmaker Nvidia (NASDAQ:NVDA) soared by 172%, while Tesla (NASDAQ:TSLA), Elon Musk's electric car company, saw a 69% increase.

By December, investor exposure to U.S. stocks reached all-time highs. According to Schroders (LON:SDR), the combined market value of the so-called "Magnificent Seven" U.S. tech stocks now accounts for roughly 20% of MSCI's global share index, heightening risks for the market if their earnings or advancements in AI technology fail to meet expectations.

China's Roller-Coaster Ride

Chinese stocks experienced a turbulent year in 2024, with a dramatic surge of nearly 16% in a single week in September following signals from Beijing about potential measures to support the weakening economy. However, this was followed by several sharp weekly declines.

Investors who maintained their positions in China throughout the year ended with a 14.5% annual gain. Yet, many anticipate that the cycle of short-term booms and busts will persist, causing ripple effects across European and Asian markets until Beijing implements more decisive interventions.

The Euro's Tough Year

The euro depreciated by roughly 5.5% against the dollar in 2024, while European stocks lagged behind their U.S. counterparts more significantly than at any point in the past 25 years. Despite four rate cuts from the European Central Bank, the eurozone's economic decline has begun to slow, and some analysts are predicting a recovery for Europe in 2025.

Historically, the odds of international markets rallying during a U.S. downturn are low. Meanwhile, gold saw a 27% increase this year as investors sought alternative options for diversification.

Interest Rates and Inflation Take Center Stage

Interest rates declined across major economies in 2024, but bond investors faced annual losses after overestimating the extent of monetary easing central banks would implement, as inflation proved more persistent than anticipated. U.S. 10-year Treasury yields increased by approximately 60 basis points, while Britain's 10-year gilt yields surged by 100 basis points, and German 10-year yields rose by 16 basis points.

In Japan, where interest rates were raised twice during the year due to accelerating inflation, the 10-year bond yield climbed 45 basis points, marking its largest annual increase since 2003.

High-Stakes Bond Markets Deliver Exceptional Returns

In 2024, bond investors found their biggest gains in some of the most high-risk markets. Lebanon's defaulted dollar bonds delivered returns of around 100%, driven by expectations that regional conflicts in the Middle East would weaken the influence of Hezbollah.

Argentina's dollar bonds also surged by 100%, fueled by optimism surrounding an ambitious reform agenda and the potential return of Donald Trump to the White House, as the country's leader, Javier Milei, maintains strong ties with the U.S. president-elect.

Similarly, Ukrainian bonds gained over 60%, bolstered by speculation that a Trump presidency could bring an end to Russia's invasion of Ukraine.