Powell’s Speech Triggers the Santa Claus Rally

This week bore witness to a divide in global monetary policy as European central banks affirmed their commitment to keep borrowing costs “higher for longer”, shrugging off the US Federal Reserve's unexpected lean towards rate reductions in 2024. Fed officials have pencilled in 75bp cuts by the end of 2024, which would bring the rate to 4.5%-4.75%. By contrast, the European Central Bank and the Bank of England maintained their hawkish policy stance, a strategy prevalent amongst most central banks as inflation levels are still above their 2% target rate, with the ECB not even broaching the concept of policy easing during its two-day meeting. Meanwhile, the Bank of England conceded that it expects to hold its high rates for a significantly extended period. In a striking display of monetary tension, Norway's central bank opted to raise interest rates.

The four different futures and options contracts expiring on Friday (quadruple witching, i.e. simultaneous expiry of stock options, index futures, index futures options and single stock futures contracts) did not have any impact on market volatility. The VIX index was hovering around 12-13, far from its long-term average. Wall Street’s major indices notched their seventh consecutive weekly gain thanks to the Fed. The Dow Jones Industrial Average hit a record high at 37,305.16 (up 2.92% for the week), while U.S. Treasury yields fell again, with the 10-year yield touching its lowest level since August, just below 3.92%. The dollar index sagged to 102.59 on dovish Fed, despite an attempted rebound on Friday (down 1.4% for the week). The benchmark S&P 500 gained 2.49%, the tech-heavy Nasdaq Composite added 2.85%. For once, small caps outperformed their large-cap peers (Russell 2000 up 5.55%).

In Europe, the DAX and CAC indices hit all-time highs intraday, but the German equity index closed the week flat while the French equity index gained 0.93%.

In Asia, Japan’s Nikkei 225 rose 2.05% amid growing conviction that the Bank of Japan will maintain its ultra-loose policy for longer. By contrast, the Shanghai Composite lost 0.91% over the week, extending its losing streak to four weeks. China's industrial production showed an unexpected growth spurt in November, suggesting a noteworthy revival in certain economic sectors. However, the momentum was counterbalanced as other key economic metrics like retail sales and fixed asset investment failed to meet initial projections.

Against this backdrop, the People's Bank of China, through its medium-term lending facility, injected approximately 1.45tn yuan ($200bn) into the economy. This move could be seen as a much-needed monetary stimulus to bolster the Chinese financial market.

Upswing in Real Estate and Cyclical Sectors

This week's Federal Reserve meeting has significantly boosted the rate-sensitive real estate sector. The S&P real estate index jumped 5.27% (best performer for the fourth time in seven weeks).

Cyclical sectors like materials, industrials, financials, and consumer discretionary also fared well, up 4.00%, 3.57%, 3.57%, and 3.47% respectively. Only one sector ended the week in the red: communication services were dragged down (-0.10%) by Alphabet stocks (-2.05%). Alphabet (GOOG) is facing criticism from investors who believed it was closing the gap with OpenAI and Microsoft (MSFT) in the field of artificial intelligence. The demonstration of the Gemini model last week was, at best, overly optimistic. The company conceded that the prompts used in a popular video were longer than initially indicated, and the AI's reaction time was significantly slower than portrayed in the video.

Keep a close eye on the latest market moves with the weekly updated league tables dedicated to fixed income ETFs.