Markets Weekly Outlook – S&P 500 in Focus as Markets Brace for Holiday Lull

The recent changes in the Federal Reserve’s policies, along with new economic projections, have had a substantial influence on the markets, leading to an increase in US yields. Investors are now contemplating the future trajectory of US interest rates based on these developments.

On Friday, the US Personal Consumption Expenditure (PCE) data was released and it grew at a slower pace than anticipated, which eased some of the selling pressure on US equities. Despite the strong overall figures, the lower-than-expected rise provided some relief for traders.

Meanwhile, the Bank of Japan surprised many by keeping its interest rates unchanged, rejecting widespread speculation about a potential rate cut. This decision flowed from positive data trends but still left the possibility of a rate hike in early 2025 on the table. Simultaneously, fears about a possible shutdown of the U.S. government grew after political tensions arose following President-elect Donald Trump's urging to Republican lawmakers against a temporary funding bill.

Looking ahead, the coming week is expected to see light trading volumes and limited price movement, thanks to the Christmas holiday and bank closures in the UK and other regions. Traditionally, the market activity tends to slow down during this festive period, setting the stage for potential consolidation in prices.

Week in Review: Hawkish Fed Sends Markets into a Frenzy

This past week marked a significant moment as market reactions to the Federal Reserve's hawkish stance were felt across varied asset classes. The word 'pivot' often comes up in these discussions, though a true confirmation may require further consistency in policy direction.

Current market calculations suggest around 40 basis points of cuts could occur by December 2025, contributing to a notable rise in US yields during the week. As the effects settled in, US equities suffered their steepest decline since the previous August, prompting significant shifts in investor sentiment.

The volatility index (VIX) also saw an unprecedented surge, exhibiting its second largest daily increase ever as traders attempted to adjust their views on the Federal Reserve's outlook. Unfortunately, those losses were not confined to US markets alone; international equities also felt the sharp impact.

However, the mood began to lift following the PCE report, which, despite showing resilience in consumption, did not climb as much as projected. This discrepancy calmed the markets somewhat and allowed US stocks to recover.

On the foreign exchange side, the US Dollar gained traction, breaking through key resistance levels. The EUR/USD pair hovered around the 1.0300 mark, while gold experienced a notable drop, falling below $2600 per ounce but managed a recovery later in the week.

Concerns regarding oil prices persisted, largely driven by apprehensions about potential declines in demand corresponding with changing rate cut expectations for 2025.

In Asia, the Bank of Japan's decision to hold interest rates steady raised eyebrows, especially given the improving economic conditions in Japan. Market watchers are now keenly awaiting clarification on future policy adjustments from the central bank.

Amid this backdrop, a rising risk of a US government shutdown has surfaced, complicating the landscape for traders as uncertainty looms overhead just before the holiday season.

The Week Ahead: Thin Liquidity Expected with Japanese Inflation and UK GDP Data

Asia Pacific Markets

Next week brings some noteworthy data from Japan, beginning with inflation figures due out on December 26th. Following this data release, BoJ Governor Ueda's speech is expected to provide insights into the central bank's future actions.

Any uptick in inflation data could boost expectations for a rate hike early in 2025, drawing investor attention.

Europe + UK + US

In the developed markets, the upcoming week appears quiet, with the highlight being the Q3 GDP data from the UK set to release on Monday. A bank holiday in the UK on December 26, coupled with holidays observed in several other regions, is likely to lead to reduced trading activity.

Additionally, the Turkish Central Bank will convene next week to discuss potential rate cuts, with indications that forthcoming alterations will closely depend on observed inflation trends.

Chart of the Week

This week, the spotlight remains on US equities with a particular emphasis on the S&P 500 index. Following its significant declines, the index still retains a degree of optimism due to its strong performance over recent years.

Historically, the S&P 500 has averaged gains of approximately 12.3% after consecutive years of 20% growth, indicating potential for continued upward momentum. Yet, caution is advised as the index’s major contributors may distort the overall picture of its performance.

The S&P faced a potential deeper correction as it briefly fell below critical levels during mid-week but a positive rally late Friday shifted sentiment once more. As we look ahead, market participants are advised to monitor resistance and support levels carefully.

Key levels to watch include:

Support:

• 5910
• 5871
• 5828

Resistance:

• 6000
• 6030
• 6093

Markets, Economy, Equities