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The US equities followed up on the European stock market gains on Monday; technology stocks gained the most and their precious contribution to the S&P500 pushed the latter up by more than 1.40% yesterday, as Nasdaq 100 rallied past 2%. US politicians’ agreement on a 2024 spending bill, Chinese authorities’ announcement of further stimulus measures and sliding oi prices helped boosting optimism.

Investors are holding their breath before Thursday’s inflation report which could give a reason to the doves to remain in charge of the market, or not…

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The New Year unsurprisingly kicked off with a hangover for both stock and bond markets, as investors began the year by closing their positions and taking profit following an impressive two-month rally that was boosted by the expectation that the Federal Reserve (Fed) would soon start cutting the interest rates and cut them thoroughly throughout this year. Last week’s jobs data from the US came in stronger than expected, yet again.

As such, there is no surprise that we see the US 2-year yield rebound to 4.40% and the 10-year yield return past 4% - its biggest weekly advance of the US 10-year yield since October. The rising yields halted the dollar’s bleeding. The EURUSD sank below the 1.10 mark as soon as the year started. The rising US yields also stopped the rally in equities. The S&P500 dipped below 4700 – having been unable to post a fresh record at the end of the latest rally, and the rate-sensitive Nasdaq 100 fell more than 4% since its December peak – which was an ATH.

Investors’ attention shifts to the US inflation data and the earnings from the big US banks that will kick off the earnings season!

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Here we are, on the last trading day of the year. We had a year completely different than what was expected.

The biggest takeaway of this year is the birth of ChatGPT which propelled AI right into the middle of our lives. Nasdaq 100 stocks close the year at an ATH, Nvidia – which was the biggest winner of this year’s AI rally dwarfed everything that compared to it. Besides Nvidia, ChatGPT’s sugar daddy Microsoft, Apple, Amazon, Meta, Google and Tesla – the so-called Magnificent 7 generated almost all of the S&P500 and Nasdaq100’s returns this year. And thanks to this few handfuls of stocks, Nasdaq100 is set for its best year since 1999 following a $7 trillion surge.

The million-dollar question is what will happen next year!

In the FX, the US dollar index rebounded yesterday as treasury yields rose following a weak sale of 7-year notes. But the US dollar is still set for its worse year since 2020. Gold prepares to close the year near ATH, the EURUSD will likely reach the finish line above 1.10 and the USDJPY having tested but haven’t been able to clear the 140 support. In the energy, crude oil remains downbeat. The barrel of American crude couldn’t extend rally after breaking the $75pb earlier this week, and that failure to add on to the gains is now bringing the oil bears back to the market.

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The US bond and stocks extended their rally on the back of soft US economic data and another strong US bond auction. The US dollar fell sharply against most majors, allowing the euro, sterling, and the yen to extend gains into the year end. The rally in the sovereign space looks overdone, hence the rally in stocks and the selloff in US dollar looks overstretched; there is a rising risk of a wild correction when the euphoria comes to an end.

Because the US has recorded the biggest two-month easing in financial conditions in its history because of the impressive US sovereign rally on rising Fed rate cut expectations. It appears that the latest easing in the US financial conditions has been more powerful than the ones observed following the announcements of the Quantitative Easing programs from the Fed. And the rapidly loosening financial conditions are hardly compatible with a sustainably low inflation… even less so as the geopolitical tensions started to disrupt global trade ways in a way that could be inflationary.

One good news is oil’s inability to ensure a sustained price rise. The barrel of US crude snapped back below the $74pb after testing the $76pb on rising Red Sea tensions.

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The barrel of American crude finally cleared the $74/75pb resistance range on the mounting geopolitical tensions in the Red Sea and traded at $76pb on Tuesday.

Elsewhere, the dovish Fed expectations continued to remain in the driver seat and drive the US stock and bond markets higher.

The US dollar remains under a decent selling pressure, gold extends gains on the back of softening US yields and the EURUSD continues to push higher above the 1.10 level on the back of hawkish European Central Bank (ECB) commentaries. Yet the rally in the Japanese yen starts giving signs of exhaustion into the 140 mark in the short run.

The Nikkei continues to find buyers despite a stronger Japanese yen, as the S&P500 buyers will certainly not back down before sending the index to a fresh high this week, or the next. The index was trading just 0.5% below its ATH yesterday, so it would clearly be a shame if we finished this year without an S&P500 record, no?

But yes, the market optimism is overstretched, the Fed’s rate cut expectations are unfunded – in that, yes, the Fed will probably cut rates but not at the speed that’s been currently priced in – the oversold market conditions do hint that a downside correction would be healthy. Once the Santa high fades, the hangover will hit.

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The last PCE print for the US was perfect. Core PCE, the Federal Reserve’s (Fed) favourite gauge of inflation, printed 0.1% advance on a monthly basis – it was softer than expected, core PCE fell to 3.2% on a yearly basis – it was also softer than expected, and core PCE fell to 1.9% on a 6-month basis, and that’s below the Fed’s 2% inflation target.

The US 2-year yield is preparing to test the 4.30% to the downside, the 10-year yield makes itself comfy below the 4% mark – and even the 3.90% this morning, and the stocks joyfully extend their rally. The S&P500 closed last week a few points below a ytd high, Nasdaq100 and Dow Jones consolidated near ATH levels and the US dollar looks miserable. The dollar index is at the lowest level since summer and about to step into the February to August bearish trend.

There is not much data left to go before this year ends. We have a light economic calendar for the week, and the trading volumes will be thin due to the end-end holiday.

This year looks set to end on a positive note as 1. Major central banks managed to rein in on inflation, the Fed seems more confident than the others. The latter looks suspicious and could stall the EURUSD rally – which will likely end the year above 1.10. The long Japanese yen is the mots popular trade of the moment but the strengthening yen will eventually jeopardize the dovish BoJ expectations. Finally, crude oil has all the reasons to break above $74/75pb resistance zone, but the battle between the bulls and the bears remains fierce close to this territory.

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Appetite in European stocks waned yesterday, yet the US counterparts recovered Wednesday losses and closed the session more than 1% higher as the latest economic data pointed at a certain slowdown.

Today's inflation print is the Fed puzzle's last crucial piece. If today’s PCE print comes in as soft as expected, or ideally softer-than-expected, we shall see the rally in bonds – and perhaps in stocks – extend the Santa rally.

Presently, swaps point at six 25bp cut in the US by this time next year. That’s a 150bp cut in total. It means that the US rates are expected to fall to 375/400bp range in a year time. And that leaves the 2-year bond – which currently yields near 4.35% with plenty of room to extend rally.

In energy, the news that Angola quits OPEC is not enchanting but the impact will be minor to none. American crude is testing the top of the downtrending channel that has been building since the end of September. The $74/75 offers continue to push back the bullish attempts, while trend and momentum indicators are strong and tell that a positive breakout is still possible and could lead the price of a barrel to near 200-DMA – near $78pb.

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We start feeling the cracks in market optimism: the bonds extended their rally yesterday after the inflation data in Britain surprised to the downside, but major US indices saw a sharp retreat. A 12% plunge in FedEx – which acts like a gauge of economic activity, the overbought market conditions in major global stock indices and the awareness that a further fall in bond yields weaken the idea of soft landing triggered a much-needed retreat in equity valuations.

We know that a further correction in equity valuations is on the cards. We just don’t know what the trigger will be.

In energy, the barrel of US crude is still working on clearing the $74/75 resistance. Yesterday’s rising US inventories somehow broke the positive momentum. But strengthening trend and momentum indicators hint that a positive breakout is possible, and a potential rally could send the barrel of crude to 200-DMA, which stands a touch below the $78pb. Yet the upside is seen limited as any significant rally in oil prices will boost global inflation expectations, crush the dream of seeing the central banks call the end of policy tightening and increase recession odds. And rising recession odds are negative for oil.

BUT, Investors could still enjoy a soft US inflation read for November, and the latter could keep the bond rally intact into Xmas. If that’s the case, the US dollar will remain under pressure. The latter will allow the euro to extend its gains against the US dollar. The pair could make another attempt on the 1.10 mark.

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Federal Reserve’s (Fed) Thomas Barkin’s words that suggested that the Fed could cut rates if recent progress inflation continues sent the Nasdaq 100 to a fresh record for the 3rd consecutive day and the S&P500 to a fresh ytd high and near an ATH record as well.

Yet, the latest FedEx results didn’t enchant investors yesterday. The company, which serves as a gauge of economic activity, missed expectations due to declining airfreight and trucking volumes. The stock price fell 7% after the closing bell.

On the data dock, the latest housing data in the US showed that housing starts jumped nearly 15% in November as the mortgage rates dipped from above 8% to below 7% thanks to a swift fall in US yields. That’s a good sign for economic health, but not necessarily for the future path of inflation. But the dollar didn’t react.

The Fed doves’ optimism is overdone given the strength of the underlying economic data, and the upside pressure on energy and shipping costs as the world’s leading energy and shipping companies have started avoiding Suez Canal due to Houthi attacks. The recent developments will start showing in the economic data in a few weeks and help investors assess the extent of global implications.

But as worries regarding the implications of developments in the Red Sea mount, latest inflation numbers from Europe and Britain give some respite.

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