Capital Markets Insights | 16 Dec - 20 Dec

• U.S. Markets: After Powell's speech, the S&P 500 showed a slight gain, closing up by 0.79% for the week. This reflects a cautious optimism following Powell's comments on a more careful approach to rate cuts, with investors processing the implications for the economy and markets. The Nasdaq, however, saw a decline, finishing the week down by approximately 3.15%. This drop can be attributed to profit-taking in tech stocks, which had been leading the market rally, and possibly a sector rotation or reassessment of valuations following the Fed's cautious signals.

• Global Markets: European stocks were buoyed by the ECB's dovish stance, hinting at further rate cuts in early 2025. Asian markets showed mixed performances, with Japan's Nikkei 225 supported by a weaker yen, while China's markets were volatile amid concerns over U.S.-China trade relations.

• Price Action: Gold prices ended the week with loss, trading near $2,622 per ounce. The US dollar’s strength and Trump’s rhetoric about stopping the wars will play a key role for the metal’s future.

• Market Dynamics: Oil prices were volatile but ended the week slightly down, with WTI at about $69. Geopolitical tensions, coupled with demand concerns from China, influenced the market. Reports on U.S. inventory levels also played a role, with less-than-expected drawdowns leading to some selling pressure.

• Key Developments: The week was marked by escalating tensions in the Middle East, particularly after Israeli air strikes in Lebanon, raising concerns about potential oil supply disruptions. Also, the U.S. and China continued negotiations over trade, with some optimism about a potential deal in early 2025.

• Crypto Market: Bitcoin saw significant volatility, ending the week with a significant loss, hovering around $98,000. The market was influenced by FED’s rhetoric on future cuts.

• Winner: USD (U.S. Dollar): The dollar strengthened against several major currencies this week, largely due to Jerome Powell's comments on a cautious approach to further rate cuts. The market interpreted this as the Fed possibly being less dovish than anticipated, which bolstered the dollar's value. Additionally, positive U.S. economic data, like the manufacturing PMI, supported the dollar's rise. The USD saw gains particularly against:
• EUR/USD: The Euro weakened relative to the Dollar following the ECB's dovish signals, contrasting with the Fed's more cautious stance.
• GBP/USD: The Pound also depreciated against the Dollar, influenced by mixed UK economic indicators and the cautious Fed outlook.

• Loser: JPY (Japanese Yen): The Yen experienced significant depreciation this week, becoming one of the biggest losers in forex markets. This was primarily due to:
• BOJ's Policy Stance: The Bank of Japan maintained its ultra-loose monetary policy in contrast to the Fed's cautious approach, leading to a weaker Yen.
• Market Expectations: Speculation that Japan might intervene to weaken the Yen further to boost exports also played a role, although no direct intervention was confirmed this week.
• USD/JPY: This pair saw one of the most substantial movements, with the Dollar strengthening significantly against the Yen, reflecting both U.S. policy stability and Japanese monetary policy divergence.

• U.S.: Key releases included a stronger than expected manufacturing PMI, which bolstered market confidence. Consumer sentiment data showed a slight decline, reflecting concerns about future economic stability under policy changes.

• Europe: Inflation data from key economies like Germany and France indicated cooling prices, potentially paving the way for more ECB rate adjustments.

• Asia: China's industrial production numbers were mixed, with some sectors showing recovery while others lagged, influencing global commodity markets.

• Global: Central banks from several countries, including Japan, the UK, and Canada, made announcements or released minutes from recent meetings, with a general theme of cautious optimism and readiness to adjust policy if needed to combat economic slowdowns.

• General Outlook: Powell acknowledged that the U.S. economy is in a "very good shape," with growth stronger than anticipated since the last Federal Open Market Committee (FOMC) meeting in September when rate cuts began. He highlighted that the economy's resilience, particularly in labor markets and consumer spending, has been a positive surprise.

• Inflation: Despite progress, Powell noted that inflation remains above the Fed's 2% target, with recent data indicating it has come in "a little higher" than expected. He emphasized that while inflation has been moderating, the path to the 2% target might be bumpier than previously anticipated.

• Labor Market: Powell pointed out that the labor market isn't showing signs of the expected slowdown; instead, it's holding up well with a low unemployment rate, suggesting that the economy might not be cooling as quickly as expected under the current policy stance.

• Current Stance: The Fed had already initiated rate cuts, bringing the benchmark rate to a range of 4.25% to 4.50%. Powell indicated that these cuts were meant to signal support for the labor market amid signs of weakening in September, but data since then has shown resilience.

• Future Policy: Powell advocated for a cautious approach moving forward, suggesting that the Fed can afford to be "a little more cautious" with further rate adjustments. This cautious tone was influenced by the stronger-than-expected economic data, indicating that there's no immediate rush to further ease monetary policy.

• Neutral Rate: He discussed the challenge of identifying the neutral rate of interest, which is neither stimulating nor restricting economic activity. Powell noted the uncertainties around this rate, suggesting that the Fed would proceed carefully, assessing incoming data before making any decisions on rate adjustments.

• Risk Management: The Fed Chair highlighted the balance between doing too little, which could entrench inflation, and doing too much, which might unnecessarily harm the economy. This balance, he noted, requires careful navigation, especially with the complexities introduced by the incoming administration's potential policies.

• Powell's speech, indicating a more cautious approach to rate cuts, influenced market expectations, with investors adjusting their forecasts for future Fed actions. This cautious stance led to a recalibration in market bets regarding the pace and extent of future rate reductions.

• The speech was seen as aligning Powell with a more conservative faction within the Fed, emphasizing patience and data dependency in policy decisions.

This Week's Top Gainer in US Markets (excluding small caps under $2B market cap)

• Company: RCM (R1 RCM Inc)

• Gain: 193.5%

This Week's Top Loser

• Company: IIPR (Innovative Industrial Properties Inc)

• Loss: -29.66%

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