Market on Close

Key Takeaways from the Past 12 Hours in Financial Markets

1. Equities: A Mixed Bag

• US Stocks: The S&P 500 dipped (-0.1%), the Nasdaq fell (-0.5%), and the Dow Jones declined (-0.2%), weighed down by significant losses in big tech (e.g., Apple -3.6%, Tesla -3.9%). The rally inspired by favorable inflation data earlier in the week lost momentum.

• Europe: Markets surged, with the DAX hitting record highs and the CAC 40 reaching a three-month peak, propelled by robust corporate results in luxury and tech sectors.

• Asia: Gains were observed, particularly in Hong Kong, driven by optimism over potential Fed rate cuts and expected Chinese stimulus.

2. Commodities: Volatility Amid Shifting Dynamics

• Energy: Crude oil prices eased slightly but remain near multi-month highs. Natural gas prices fell in Europe (-2.66%) despite colder weather, thanks to ample supply.

• Metals: Gains in steel rebar (+2.55%) and gold (+0.94%) indicate resilience amid inflationary concerns and expectations of monetary easing.

• Agriculture: Palm oil (-4.13%) and cocoa (-3.67%) led declines, while sugar (+1.93%) posted gains.

3. Fixed Income: Easing Yields

• US Treasuries: The 10-year yield dropped to 4.62%, reflecting dovish sentiment amid weaker retail sales and higher-than-expected jobless claims. Markets expect rate cuts later this year.

• Global Bonds: UK and European yields followed suit, driven by easing inflationary pressures and dovish central bank signals.

4. Currencies: Dollar Resilience

• The US Dollar Index edged higher (+0.14%), while emerging market currencies like the Mexican Peso (-1.29%) and Brazilian Real (-0.5%) suffered on geopolitical and fiscal concerns. The British Pound weakened (-0.36%) following disappointing GDP growth.

5. Macro Indicators: Growth Concerns Persist

• US: Retail sales rose less than expected (0.4% MoM), signaling softening consumer demand. Jobless claims increased, indicating slight labor market cooling.

• Europe: Inflation trends continued to moderate, reinforcing the ECB's rate-cutting narrative.

• Emerging Markets: Brazil’s economic activity disappointed, with fiscal and economic fragilities overshadowing marginal growth in key indicators.

6. Global Themes: Rate Cuts in Focus

• Central banks across major economies signal gradual easing in response to slowing inflation and weaker growth.

• In Europe and the US, corporate results provide pockets of optimism but remain uneven across sectors.

Conclusion:

Financial markets are navigating a complex landscape where optimism over potential monetary easing is tempered by slowing growth and uneven sectoral performances. Commodities and currencies reflect this uncertainty, while equities highlight diverging regional strengths. The upcoming days will likely focus on further corporate earnings and economic data to refine expectations for 2025.

I am constructive on the immediate earnings cycle and solid earnings should keep stocks buoyant for the short term. However, nascent signs of slowdown are accumulating, and commodities prices are signaling scope for inflation resurgence. Slowdown is to be expected; long end rates are high relative to recent experience and we don’t yet know where the neutral policy rate is. What level of rates can the US economy tolerate? Only time will tell, but my strong suspicion is that the neutral rate has a 4 handle, and there is a surprisingly long runway of growth ahead.

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