Daily Market Outlook, December 14, 2023

Munnelly’s Market Minute…

Asia - Following the Federal Open Market Committee (FOMC) decision to maintain unchanged rates and introduce a dovish adjustment to its statement guidance, most stocks in the Asia-Pacific region experienced gains. The FOMC's decision to cut its 2024 median dot by more than anticipated, indicating a potential three rate cuts in 2024, contributed to the positive market sentiment. Fed Chair Powell's dovish tone during the press conference further supported the upward trend. Initially, the Nikkei 225 saw an increase but struggled to sustain its gains due to losses in the banking sector and a strengthening currency. On the other hand, the Hang Seng and Shanghai Composite both opened higher, with the former benefiting from the Hong Kong Monetary Authority's decision to keep rates unchanged in alignment with the Fed. However, gains in the mainland were limited due to disappointing loans and aggregate financing data.

Europe - Investors are preparing for rate cuts in several developed countries, as a dovish sentiment spreads. The European Central Bank (ECB), Bank of England (BOE) expected to have steady outcomes in their upcoming meetings. The ECB meeting was already anticipated to be eventful due to slowing inflation, and now markets expect any opposition to rate cuts by ECB hawks to be minimal. EURIBOR futures for December 2024 have surged, indicating an expectation of over 100 basis points of easing by September. The market has also priced in rate cuts by the BOE in 2024.

US - Stateside, the Federal Reserve kept interest rates unchanged and Jerome Powell, the head of the central bank, stated that their previous tightening of monetary policy is likely over due to inflation decreasing faster than expected. The majority of Fed officials predict that the policy rate will be lower by the end of 2024 compared to its current level, with the median projection showing a decrease of three-quarters of a percentage point. As a result of the Fed's decision, there is an increased likelihood of rate cuts starting as early as March, according to the CME’s FedWatch. The market has already factored in over 150 basis points of easing next year.

FX Positioning & Sentiment

The US Federal Reserve's pivot to a more dovish stance has created an opportunity for the People's Bank of China to provide some much-needed stimulus to their struggling economy. The Fed's unexpected change in policy has led to lower Treasury yields and a weaker US dollar, which should alleviate some of the downward pressure on China's yuan. Previously, the PBOC had been hesitant to further ease their monetary policy due to concerns about widening yield gaps and added pressure on the CNY. However, with the threat of the Fed's higher rates now removed, the PBOC may surprise markets by cutting the one-year MLF rate by 15 bps to 2.35%.

CFTC Data

During the period from November 29 to December 5, the net speculative position for the USD shifted from long to short. The $IDX increased by 1.35% during this period. The EUR$ decreased by 1.77% and speculators now hold 152,360 long contracts. The $JPY decreased by 0.24% and speculators now hold 104,956 short contracts. The Yen gained value after the period ended due to more hawkish talk from the Bank of Japan (BoJ), with a BoJ meeting scheduled for December 19. The GBP$ decreased by 0.88% and speculators now hold 11,665 long contracts. The AUD$ decreased by 1.4% and speculators now hold -57,681 contracts. The $CAD increased by 0.15% and speculators now hold -57,848 contracts. Bitcoin (BTC) increased by 15.6% during this period, with speculators reducing their contracts by 505 into new highs for 2023.