Wall Street may be poised to potentially reach new heights, while the USD may experience further weakness in the closing days of 2023
After a three-month slump, Wall Street rebounded on the wave of AI enthusiasm, recovering most of its losses from August to October. The US Big Seven recorded an average monthly gain of approximately 12%, outpacing the S&P 500's 9%. The Nasdaq, a tech-heavy index, saw an 11% rise, and the Dow was up by 7%. Simultaneously, the US 10-year government bonds experienced their most significant monthly gain since 2008, with yields dropping by 58 points in November.
While the Christmas rally is not guaranteed, historical patterns suggest a year-end bullish trend. Factors contributing to this trend include Tax-Loss Harvesting, where investors sell losing holdings to offset capital gains, Portfolio Rebalancing by fund managers, and the general Holiday Spirit.
However, the US Federal Reserve's rate decision and its communication on future policy will shape the tone for December and the coming year. Despite the Reserve Bank pausing rate hikes in the last two meetings, the belief in markets is that the policy rate may have peaked but could stay higher for longer. The outcome depends on crucial upcoming economic data, particularly the next US Consumer Price Index (CPI) and the quarterly GDP. If inflation remains sticky and economic growth stays resilient, it will likely lead to a "soft landing" and might not deter stock markets from reaching new highs, despite high interest rates.
On the other front, persistent bets on peak rates may continue to weigh on the US dollar, benefiting riskier currencies, especially commodity-linked currencies like the Australian dollar and the New Zealand dollar.
Australian Market and Currency Trends
The Australian Securities Exchange (ASX) snapped a three-month losing streak, rising by 4.5% in the month, buoyed by a global risk-on sentiment. Despite the Reserve Bank of Australia's relatively hawkish stance, investors showed no fear of higher rates. The weakness of the US dollar provided a lift to metal prices, propelling Australia's mining stocks. Notably, major gold miners such as Northern Star Resources and Evolution Mining surged in November due to rising gold prices, and this momentum could extend into December.
From a macro perspective, the peaking rates narrative may continue to fuel Australian stock markets during the holiday season. Given lighter-than-expected October Consumer Price Index (CPI) data, the Reserve Bank of Australia kept interest rates unchanged in the December meeting. In fact, it only increased the rate once in the past 6 meetings, which indicates that the hiking cycle may have come to an end.
Market sentiment suggests the US dollar may continue to soften as markets anticipate the Federal Reserve to begin cutting interest rates as early as May 2024. This could further boost the Australian dollar to continue its bottom reversal against the greenback.
On the economic front, attention will be on key data releases, including Australia's third-quarter GDP and monthly employment change, providing insights into whether the country is heading for a "soft landing."
New Zealand Dollar's Performance Amidst Uncertainties
Following global risk-on movements, New Zealand's benchmark index, the NZX 50, gained 5.3%, and the NZD Trade Weighted Index (TWI) rebounded by 3% in November. Despite the Reserve Bank of New Zealand halting rate hikes for the fourth consecutive time in November, hints of a rate cut not occurring until 2025. With no RBNZ meeting this month, the New Zealand dollar's movement is likely to be more impacted by global factors by year-end.
The ongoing rebound of the Kiwi dollar faces challenges, given recent disappointing Chinese economic data and subdued dairy auction prices. Locally, the central-right government encounters hurdles in reaching an agreement on pro-economic growth policies. These factors may exert pressure on the local currency in December.
The release of third-quarter GDP data this month will be crucial for New Zealand's markets, offering insights into how soon the RBNZ may start cutting interest rates.
Gold Hits Record Highs
Gold maintained its bullish momentum in November, reaching a new record high on December 4th at over US$2,100 per ounce. The surge was primarily attributed to sharp declines in US government bond yields and a weakened USD. Gold, seen as a safe haven asset, thrived amidst global uncertainties, including the prolonged Hamas-Israel conflict, extended global manufacturing PMIs, and concerns about China's economic outlook in 2024.
From a technical standpoint, the bullish breakout above the pivotal resistance at its previous high could propel gold even higher in December. Potential near-term resistance may be encountered around $2,155, with the price possibly testing $2,200 if this level is breached.
Crude Oil Faces Challenges
Crude oil has faced challenges in recent months, with both WTI and Brent futures declining for the second consecutive month in November, down 6% and 5%, respectively. The imbalance in supply and demand, amplified by increased US production and weakened Chinese economic data, contributed to the downturn. The Energy Information Administration reported a new monthly record of 13.24 million barrels per day in US crude production in September, with expectations to reach 13.3 million per day in 2024. China experienced deflation in October, and manufacturing activities contracted in November. OPEC+ lost its power to tighten output due to disagreements among members on further production cuts.
Traders appear not to anticipate the Hamas-Israel conflict expanding into a regional war in the Middle East. Oil prices may continue to decline in December if China fails to show a positive turnaround in its economic data. The potential further support could be around a six-month low of about US$63 for WTI and US$71 for Brent.
Bitcoin Approaches US$50,000
Cryptocurrencies, including Bitcoin, witnessed a bullish run throughout November, with Bitcoin rising by 9% and surpassing $40,000 in early December due to heightened rate hike expectations. Despite events involving FTX and Binance this year that have contributed to market volatility, these incidents may have triggered a relief rally in the digital coin market. The potential approval of a spot ETF early in 2024 may increase accessibility for institutional and retail investors, likely prompting fund managers to consider adding this asset class to their portfolios.
Also, the prospect of the Federal Reserve entering a rate-cutting cycle around mid-2024 is a macro bullish factor for Bitcoin. With Bitcoin surpassing $40,000, the prospect of reaching another milestone at $50,000 may not be far off.
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