Last week’s sharp rise in the ASX200 looks set to be short-circuited today after the share price futures market dropped 74 points on Friday night.
The 3.4% (248-point) gain last week for the ASX 200 was one of the strongest weekly gains this year, leaving the market well-positioned for today’s trading resumption. However, Friday saw the three major US indexes—the Dow, S&P 500, and Nasdaq—rattled by two Fed officials attempting to temper the growing market belief that interest rate cuts would occur sooner than expected.
New York Federal Reserve President John Williams was the stronger of the two, pushing back on these surging market expectations of rate cuts, emphasizing the central bank’s focus on aligning monetary policy with the goal of bringing inflation back to its 2% target. “We aren’t really talking about rate cuts right now,” Williams stated in an interview with CNBC. He deemed it “premature” to consider lowering rates at this point.
Despite this setback, the Dow achieved a fresh intraday record on Friday, and the Nasdaq-100 closed at a record high, marking their seventh consecutive winning week. The Dow added 56 points (0.2%) to reach 37,305.16, while the S&P 500 dipped 36 points (0.01%) to 4,719.19, and the Nasdaq ended up 52 points (0.4%) at 14,813.92. The separate Nasdaq-100 index also reached a record close dating back to November 2021, closing at 16,623.45.
The simultaneous expiration of stock index futures and options, along with options on individual stocks, in the quarterly event known as “triple witching” may have exaggerated price moves.
As of Friday, the Dow is up 3.7% in December, the S&P 500 has risen by 3.3%, and the Nasdaq Composite has increased by 4.1% this month. The S&P 500, which marked its longest weekly winning streak since 2017, is less than 2% away from its all-time high set in January 2022.
The S&P 500 has surged approximately 15% since late October, driven by hopes for an interest rate pivot. It was up 2.5% for the week, the Dow added 2.9%, and the Nasdaq followed closely with a gain of almost 2.9%. This year could see a gain of over 20%, marking the third such gain in the past five years.
On Friday, the 10-year US Treasury bond yield eased to 3.91% from 3.92% late Thursday, down from its October peak above 5%, the highest since 2007. The US dollar’s decline contributed to small gains in gold, copper, other commodities, and even oil.
The weakness in the US dollar led to a sharp increase in the Australian dollar to over 67 US cents (67.07 US cents), resulting in a weekly gain of almost 2%. Eurozone shares rose by 0.8%, Japanese shares gained 2.1%, while Chinese shares fell 1.7% due to ongoing concerns about Chinese growth and its property sector.
The local market is now experiencing the same level of anticipation regarding possible rate cuts that have garnered attention on Wall Street. Shane Oliver, Chief Economist at AMP, noted, “The positive global lead and the flow-on from the Fed’s pivot to expectations for RBA rate cuts next year saw the Australian share market surge 3.4% for the week, with property, IT, material, and health stocks leading the charge. This has substantially improved its year-to-date gain to a respectable 5.7%, although it still remains a relative under-performer.”
Friday night’s fall in the share price index will trim that gain—a significant decline in the futures market.
Looking ahead to 2024, Dr. Oliver wrote in his weekend note that shares remain vulnerable to concerns about stubborn inflation, recession fears, worries about the Chinese economy, and geopolitics. However, they are likely to see more upside in the months ahead as inflation eases, the monetary policy environment becomes less threatening, and positive share market seasonality remains in place, with the Santa Rally typically kicking in around mid-December.
Dr. Oliver noted, “Over the last 15 years, the period from mid-December to year-end has seen an average gain of 0.7% in US shares, with shares up in this two-week period 10 years out of 15. In Australia, over the last 15 years, the average gain over the last two weeks of December has been 1.4%, with shares up 10 years out of 15. It has tended to be weaker or less reliable in years when the market is down year to date.”