Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chief China Strategist
Summary: The Fed kept interest rates unchanged as expected, and in its statement, added the term "any" to describe potential future policy adjustments. Chair Powell indicated that this reflects a recognition that the Fed is likely at or near the peak of the current rate cycle. This resulted in a substantial rally in Treasuries, particularly in the short end, with the 2-year yield dropping 30bps to 4.43% and the 10-year yield falling 18bps to 4.02%. Stock markets responded positively, with the Dow Jones reaching an all-time high, gaining 1.4%, while the S&P500 and Nasdaq 100 rose 1.4% and 1.3%, respectively. Simultaneously, the dollar experienced a significant decline, with AUD and JPY strengthening by 1.7% to 0.6665 and 142.85 respectively.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
US Equities: Stocks rallied on a dovish FOMC and Powell. The Dow Jones Industrial Average surged 1.4% to 37,090, reaching an all-time high. The S&P500 gained 1.4% to 4,707, and the Nasdaq 100 added 1.3% to 16,562. The momentum is likely to continue through December, with the S&P500 approaching 5,000. Investors are likely to conclude that the Fed will cut rates more and faster than previously priced in. In extended hours, Adobe sank 5.4% after the software giant provided a downbeat sales outlook for 2024, as it will take time for generative AI products to generate revenues.
Fixed income: Following a dovish FOMC statement and remarks from Fed Chair Powell that effectively signaled potential rate cuts, Treasuries experienced a significant rally. The short end performed well, with the 2-year yield dropping 30bps to 4.43%, while the 10-year yield decreased by 18bps to 4.02%. We reiterate our prediction that the Fed will initiate rate cuts in Q1 2024, and we anticipate further gains in the Treasury market.
China/HK Equities: The Hang Seng Index slid 0.9% and the CSI300 plunged 1.7% on Wednesday, putting an end to the rally earlier this week. This occurred as the readout from China’s Central Economic Work Conference, which set the agenda for economic policies in 2024, contains policy priorities that are essentially familiar rhetoric. Mobile phone stocks outperformed. Xiaomi, rising 2.5%, topped the performance within the Hang Seng Index. AAC Technologies and Sunny Optical gained over 1%.
FX: The dollar plummeted as Treasury yields fell sharply after the FOMC. The DXY plunged 0.9% as the dollar dropped against all G-10 currencies. AUD and JPY gained around 1.7%, with AUDUSD at 0.6665 and USDJPY at 142.85. GBP underperformed due to weaker-than-expected GDP prints, gaining only 0.5% against the dollar, trading at 1.2620.
Commodities: Gold rallied 2.4% to $2,028 amid sharp declines in Treasury yields and the dollar. WTI crude and Brent crude surged around 1.4% to $69.5 and $74.3 respectively. US Mexican Gulf Coast crude inventory fell for the third week to 247.9 million barrels.
Macro
Macro events: US Retail Sales (Nov), Bank of England meeting, Japan Machinery Orders (Oct)
Earnings: Costco, Lennar
In the news:
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