Due to the Christmas holiday, the overall market trend this week has been relatively calm. The three major US stock indexes fell sharply on Friday but continued to rise throughout the week. The US dollar index continued to fluctuate at a high level, with gold slightly falling and silver slightly rising.
In terms of the US stock market, although no important economic data was released on Friday, December 27th, and there were no unexpected events driving the decline, the US stock market collectively fell, led by large technology stocks. The Nasdaq fell more than 2% during the day, the Dow Jones Industrial Average fell 0.77%, ending its five consecutive daily gains, and Tesla fell more than 6% at one point. All three major US stock indexes rose throughout the week, with the S&P 500 index rising 0.67% this week; The Dow Jones Industrial Average has risen by 0.35% this week; The Nasdaq index has risen by 0.76% this week.
Most European stock markets have risen this week, with the European STOXX 600 index accumulating a 0.99% increase throughout the week; The German DAX index has risen by 0.5% this week; The French CAC40 index has risen 1.11% this week; The FTSE 100 index in the UK has risen by 0.81% throughout the week.
In the Asia Pacific market, Japanese stocks strengthened on a weekly basis, with the Nikkei 225 rising 4.08% for the week, closing at the highest level since July this year at 40281.16 points; The Indian stock index rose 0.84% this week; The South Korean Composite Index rose slightly by 0.03% this week.
In terms of the foreign exchange market, the US dollar index rose about 0.16% this week, while non US currencies remained under pressure. The Japanese yen fell 0.93% against the US dollar throughout the week, and fell below 158 at one point during the week, hovering at a five month low; The Korean won is still approaching a 16 year low against the US dollar; The euro fell 0.04% against the US dollar for the week.
In the bond market, on Friday, the yield of 10-year US treasury bond bonds rose nearly 1% to 4.62%, close to a seven month high. Since December, the yield of 10-year US treasury bond bonds has risen by more than 40 basis points.
In terms of bulk commodities, influenced by the rise of the US 10-year treasury bond bonds, the gold price fell this week, the main gold futures contract in New York fell 0.33% in the whole week, and the main silver futures contract in New York rose 0.06% this week. Due to the unexpected decrease in US EIA crude oil inventories, oil prices rose on Friday, with WTI crude oil up 1.15% and ICE crude up 1.46% for the week.
Next week, S&P Global and ISM will successively release the PMI report of the manufacturing industry, or let investors further understand the current economic health of the United States. At the same time, the issue of the US debt ceiling may also make US stocks face fluctuations. As the policy divergence between the US and Japanese central banks widens, leading to a weak yen, foreign exchange traders may remain vigilant about the Bank of Japan's intervention.
US stocks may face high volatility
In history, the US stock market has always had a "January effect", and the January rise has become a seasonal phenomenon. One explanation is that institutional investors need to lower taxes and fees at the end of each year, so they often sell securities to reduce capital gains, triggering a wave of selling. In the month after the New Year, they will repurchase some of the stocks they originally held, leading to a rise in the stock market for the month. Another explanation is that investors use the year-end bonus they receive to increase their stock investments next month.
However, since the 1990s, the "January effect" has been more advanced to the end of the year. Analysts believe that the withdrawal risk faced by US stocks in early 2025 may be increasing, mainly including two aspects. On the one hand, the yield of US 10-year treasury bond bonds hovers at a seven month high, increasing downward pressure on US stocks; on the other hand, the market will continue to pay attention to the liquidity problems faced by US stocks.
Goldman Sachs and other investment banks have recently stated in reports that the pressure on market funds and technical factors such as pension funds adjusting their positions between stocks and bonds at the end of the year may exacerbate market selling and volatility in the short term. Goldman Sachs' trading department estimates that due to the trend of stocks and bonds, US pension funds may sell $21 billion worth of US stocks and purchase an equivalent amount of bonds at the end of the year.
Meanwhile, the Federal Reserve's balance sheet shows that as of December 23, the total amount of bank reserves absorbed by the Fed's liability side has dropped to $3.23 trillion, which is about to fall below the level when the Fed launched QT in June 2022; At the same time, the overnight reverse repo tool (ONRRP) fell to $520 billion, a decrease of nearly 80% compared to when QT was launched.
The excess liquidity in the financial system has been significantly drained, and as reserves approach the "bottom line" level, the liquidity pressure faced by the banking system is also intensifying. If the scale reduction continues to advance to a situation where reserves are severely insufficient, it may trigger a liquidity shock similar to the 2019 "repo market crisis".
Recently, a research report by CITIC Securities also stated that with optimism fully overdrawn, liquidity still tightening, and a performance gap period, it is expected that the short-term profit taking correction in the US stock market will continue.
In addition, it should also be noted that the looming US debt ceiling issue will also affect the trend of US stocks. On December 27th, US Treasury Secretary Janet Yellen sent a letter to congressional leaders warning that the US Treasury expects to hit the debt ceiling as early as mid January 2025 (between January 14th and 23rd) and may need to take "special measures" to avoid the federal government falling into a crisis of debt default.
The issue of the debt ceiling may put pressure on financial markets and bring upward pressure to the already rising borrowing costs in the United States. As the debt ceiling approaches, market risk aversion intensifies, risk assets decline, and safe haven assets rise. However, the yield of short-term US Treasury bonds has risen due to the existence of certain default risks.
The Health Status of the US Economy
The US Consumer Confidence Index showed a decline in December, as consumers became increasingly concerned about the economic situation. According to data released by the Conference Board on the 23rd local time, the US consumer confidence index for December fell to 104.7, lower than market expectations. The data shows that the US consumer confidence index in December was 104.7, a decrease of 8.1 from the revised value in November (112.8), ending the previous two consecutive months of gains. More consumers list "politics" and "tariffs" as factors that affect their expectations for the future economy.
On Friday, January 3, 2025 (Beijing time), the December ISM Manufacturing Purchasing Managers' Index (PMI) in the United States may further inform the market about the health of the US economy. The market expects the ISM manufacturing PMI to slightly decrease from 48.4 last month to 48.2 in December, and the price index is expected to rise from 50.3 to 52.2. In addition, the weekly number of initial unemployment claims to be announced on Thursday, January 2, 2025 may also become a factor affecting market expectations and asset prices.
Analysts generally believe that any data that affects market expectations of future interest rate cuts by the Federal Reserve could put pressure on the upward trend of the US dollar, given its continued approach to its annual high.