Week of December 25

In the lead-up to the holidays, the Dow hit a record high but the S&P 500 narrowly missed out as the dollar slid to a 5-month low and the BOJ kept policy unchanged. The week between Christmas and New Years is expected to have little in the way of market-moving events as investors close out the trading year.

The Week in Review

The most anticipated event of the last week was the BOJ's rate decision, and given the large drop in the yen post-event, markets were disappointed by the lack of policy guidance. In his post-rate decision presser, Governor Kazuo Ueda stressed that no announcement of moving away from ultra-easing was to be expected at the next meeting, either. The Japanese yen has support at 140.60 against the US dollar while trading under 144.30.

The other event to garner headlines was the mid-week sudden drop in US equities, with the S&P 500 shying away from a new record high to fall by as much as 1.5%. Analysts couldn't point to a single event to drive the sudden change, with the most likely explanation being the thin volume due to the holidays. The market recovered the day after, as economic growth in Q3 was weaker than expected at 4.9%, pointing to a sooner cut to stimulate the economy.

Through the start of the week, Fed officials had pushed back on market expectations of even more cuts than the FOMC suggested after its last meeting. They warned of the disconnect between a dovish market outlook and the Fed insisting on keeping rates restrictive to curb inflation that is not expected to reach target for months. 

ECB officials continued to present differing views on rate cuts, with France's Francois Villeroy suggesting that lower rates were possible next year, while Greece's Yannis Stournas insisted that inflation had to come down more. EURUSD reclaimed $1.10 and prepared to leave behind support at the round level, exposing $1.1095 next.

UK November inflation was well below forecasts, aligning with the BOE's view that price growth will slow dramatically and raising bets that rate cuts will come as soon as May. The pound closed barely higher despite a widely weaker dollar, with price action around $1.27 to provide directional clues going forward. 

In geopolitics, Houthi rebels in Yemen intensified attacks on shipping at the southern entrance to the Red Sea as shipping companies started to make plans to avoid the area. WTI could see an extension to $77-78 if momentum can be maintained, otherwise, pullback towards $72.50 a barrel. China announced new restrictions on mobile games, leading to a selloff in tech firms at the end of the week.

Biggest Market Movers

• The USDJPY shot to 145 after the BOJ rate decision and Governor Ueda's comments but fully reversed by the week's close.
• WTI trended to $75 a barrel on transportation concerns after BP announced it would suspend transport through the Red Sea due to attacks from Yemen rebels. Some gains were offset by an EIA report downgrading its demand forecasts.
• EURUSD jumped 1% to $1.10 close to the end of the week as thin trading generated higher volatility.
• Yield on 10-year US Treasuries drifted lower, hitting levels not seen since the middle of the summer. Gold gained a little under 2% to around $2050 per ounce.

Top Events in the Week Ahead

A dearth of economic events characterises the coming trading week. Virtually all markets are closed on Monday, with China and Japan being notable exceptions. That continues on Tuesday, with the US joining the handful of markets that will be open. The week is shortened at the end, with UK markets closing early on Friday. 

No significant economic data is scheduled to be released, nor are any large global corporate names on the docket to report earnings. However, the end of the year is often a time for some companies to slip out negative data. Given the lack of scheduled economic events, geopolitics could have an oversized impact on the markets, with the ongoing conflicts in Ukraine and the Middle East and growing concern over the inflationary impact of the shipping crisis in the Red Sea.

Initial jobless claims and pending home sales scheduled for Thursday. In the week ending December 16, initial claims rose slightly by 2K to 20K, indicating a relatively tight labour market. Pending home sales declined 8.5% year-on-year in October 2023, following an 8.7% drop in September. All four US regions saw declines in transactions.

Moreover, the typical API and EIA reports will be due Wednesday and Thursday. A significant miss or beat on crude oil inventories could lead to volatile moves.