By Naomi Rovnick, Dhara Ranasinghe and Rodrigo Campos
LONDON (Reuters) - Markets that began the year with investors expecting a global stock rally to fizzle, swift U.S. interest rate cuts to boost Treasuries and soften the dollar and emerging market currencies to strengthen have firmly defied that consensus.
World stocks are set for a second consecutive annual gain of more than 17%, unfazed by wars in the Middle East and Ukraine, Germany's economic contraction and government collapse, French budget chaos and China's slowdown.
That comes mostly thanks to a second year of huge gains for Wall Street stocks as artificial intelligence fever and robust economic growth sucked more global capital into U.S. assets and took the dollar up 7% against peers in 2024.
U.S. exuberance rose after Donald Trump's Nov. 5 election win, as traders focused on the President-elect's plans for tax cuts and deregulation, with the surge in animal spirits propelling cryptocurrency bitcoin to a 128% annual gain.
World markets enter 2025 increasingly exposed to U.S. trends - a risk factor that burst into life after the Federal Reserve roiled markets this month by pointing to fewer rate cuts in the year ahead.
That came after weak U.S. jobs data and a surprise midyear Japanese rate hike that pressured dollar-denominated assets and sent a volatility wrecking ball swinging through global markets and sparked a short-lived rout in August.
Debt investors, meanwhile, are growing anxious about Trump's proposed trade tariffs refueling inflation and fear excessive White House borrowing that could roil the $28 trillion Treasury market and spark wider government bond disruption.
"It's going to be difficult, in the event of a (U.S.) pullback, to find anywhere to hide," Barclays private bank chief market strategist Julien Lafargue said.
WALL STREET JUGGERNAUTS
Wall Street's S&P 500 share index is 24% higher this year after a similar jump last year, in its strongest two-year streak since 1998.
Shares in artificial intelligence chipmaker Nvidia rose 172% in 2024, Elon Musk's carmaker Tesla gained 69% while investors' exposure to U.S. stocks hit record levels in December.
The combined value of the so-called Magnificent Seven U.S. tech stocks accounts for around a fifth of MSCI's world share index, according to Schroders, raising market threat levels if their earnings or AI technology disappoint.
EUROPE'S STRUGGLES
The euro slid around 5.5% against the dollar this year while European stocks performed worse relative to their U.S. peers than they have in at least 25 years.
After four European Central Bank rate cuts, the euro zone economy is declining more slowly and some forecasters are tipping Europe for a 2025 rebound.
The chances of any international market rallying if the U.S. falters are usually slim. Gold gained 27% in 2024 as investors struggled to find other diversification trades.
MIGHTY DOLLAR
U.S. tariff fears and dollar strength have hit emerging market currencies particularly hard, exacerbating losses for struggling nations.
Currencies in Egypt and Nigeria fell around 40% against the dollar following devaluations, and Brazil's real weakened more than 20% as worries about government debt and spending intensified.
A sparse set of mild annual gains included a 2% rise for Malaysia's ringgit. Among the top performers South Africa's rand, the Hong Kong dollar, and Israel's shekel hovered near unchanged for the year.
"We continue to be cautious on emerging market currencies, and the main reason behind that is the Trump trade war," said Arif Joshi, co-head of emerging market debt at Lazard Asset Management.
CHINA ROLLERCOASTER
Chinese stocks had a wild year, surging almost 16% in a single week in September after Beijing signaled its readiness to stimulate the weakening economy, with a number of deep weekly falls since.
Investors who held on to China in 2024 were rewarded with an 14.5% annual gain but many expect the short-term boom and bust cycle to continue, disrupting markets in Europe and Asia, until Beijing takes direct action.
BOND BULLS BRUISED
Interest rates fell across big economies this year but bond investors suffered annual losses after spending much of 2024 pricing in more monetary easing than central banks eventually delivered as inflation stayed stickier than expected.
U.S. 10-year Treasury yields rose roughly 60 basis points in 2024, Britain's 10-year gilt yield jumped 100 bps and 10-year German yields added 16 bps.
In Japan, where interest rates rose twice this year as inflation accelerated, the 10-year bond yield added 45 bps in its biggest yearly jump since 2003.
Next year looks challenging for bond markets uncertain about how Trump's policies will sway the U.S. Federal Reserve. French debt turmoil last month also signaled the so-called bond vigilantes stand ready to punish governments for excessive borrowing.
SURPRISE WINNERS
Bond investors' 2024 wins came from some of the riskiest markets.
Lebanon's defaulted dollar bonds returned around 100% over the year as investors anticipated Middle East conflict weakening armed group Hezbollah.
An ambitious reform programme and the prospect of Trump's White House return powered a 100% return for dollar bonds issued by Argentina, whose leader Javier Milei has close ties with the U.S. president-elect. Boosted by bets that Trump could end Russia's Ukraine invasion, Ukrainian bonds returned over 60%.
