With the 10-year US Treasury yield, known as the anchor of global asset pricing, further hitting its lowest level since mid July on Wednesday, optimism in the global market was further ignited overnight. One of the most representative market changes is the strong overnight rise of the MSCI Global Index by 0.49%, setting a new high since February 2022.
Market data shows that the yield of US Treasury bonds with different maturities recorded a decline of over or nearly double-digit basis points overnight. Among them, the 2-year US Treasury yield fell 11.1 basis points to 4.254%, the 5-year US Treasury yield fell 9.5 basis points to 3.799%, the 10-year US Treasury yield fell 10.1 basis points to 3.799%, and the 30-year US Treasury yield fell 9.2 basis points to 3.955%.
In the foreign exchange market, the ICE US dollar index, which measures the US dollar against six other currencies, also fell 0.48% on Wednesday to 100.98, the lowest since July 27th, in sync with the decline in US bond yields. Driven by the expectation of the Federal Reserve raising interest rates and subsequent aggressive rate hikes in response to inflation, the US dollar index had previously risen strongly for two consecutive years, but currently it is expected to fall by nearly 2.5% in 2023.
Compared to other major central banks, the Federal Reserve is currently widely regarded as a dove. After Federal Reserve Chairman Powell unexpectedly showed an attitude of discussing interest rate cuts at the December meeting, market expectations for the Fed's interest rate cut in March next year have significantly increased. The interest rate chart released by the Federal Reserve at the meeting also predicts a 75 basis point rate cut in 2024.
The expectation of interest rate cuts has driven market optimism to continue to rise. In the US stock market, the S&P 500 index closed just one line away from a historic high on Wednesday, demonstrating the optimistic sentiment that has driven the stock market to rebound this year after suffering setbacks in 2022.
The benchmark stock index closed up 0.1% on Wednesday, only 0.3% behind the record closing high set in January 2022. The Nasdaq Composite Index, which is concentrated in technology stocks, rose 0.2%. The blue chip Dow Jones index rose by approximately 111 points, or 0.3%, setting a record high for the sixth time this month.
It took nearly two years for the S&P 500 index to return to its previous high and approach a new record. Last year, stubborn inflation, aggressive interest rate hikes and the Russia-Ukraine conflict made the stock market lose its upward momentum. Investors were still worried about the possibility of a recession as they entered 2023, but these concerns have calmed down a lot this year. The Federal Reserve's interest rate hikes helped curb inflation, but did not trigger an economic recession, which prompted investors to enter a "buy" mode. After the Federal Reserve's decision earlier this month, the Dow Jones Industrial Average hit a new record high for five consecutive trading days.
The European stock market is currently showing a hot trend at the end of the year. The Pan European STOXX 600 index closed up 0.3% again on Wednesday. This European benchmark index has risen for seven consecutive weeks, with a nearly 13% increase this year. The retail and technology sectors performed the best.
Of course, regarding the market fluctuations at the end of the year, Sean Simko, Managing Director and Head of Fixed Income Portfolio Management at SEI Investments, is also cautious in stating that during the last week of each year, many traders are usually not at their desks and should be cautious in observing changes in returns. He believes that any changes in the interest rate market should not be seen as real signs that may occur in 2024.
"When there are few catalysts and very little trading activity, you often see a continuation of the trend," said Chuck Carlson, CEO of Horizon Investment Services.
Gennady Goldberg, head of US interest rate strategy at Dow Securities, believes that the timing and magnitude of the Fed's ultimate rate cut will still largely depend on economic data, including the strength of the labor market. He said, "If the data is better than expected - for example, if the next employment data and the next inflation data are slightly higher - you may still see room to readjust expectations. Although the Federal Reserve is trying to signal their desire for a soft landing, we need to see if the data matches."