Lending Association

Navigating market dynamics amid U.S. holiday, mixed economic indicators, and international tensions

U.S. markets observed a trading holiday on Monday due to the Martin Luther King public holiday, leading investors to exercise caution on Friday. Additionally, another round of air raids on Houthi rebels in Yemen by the U.S. over the weekend, although occurring when oil markets were closed, is expected to reverberate through global dealings outside the U.S. today and into tomorrow.

Despite Thursday’s gains from the initial round of attacks, Friday saw a decline as share investors focused on a drop in U.S. producer prices and lackluster quarterly reports from major American banks. Notably, giants like JPMorgan posted a positive outcome, while Bank of America faced a downturn. This resulted in the Dow slipping by 0.31%, closing at 37,592.98, with the S&P 500 managing a modest 0.08% gain, ending at 4,783.83, and the Nasdaq staying slightly positive, adding 0.02% to settle at 14,972.76. Despite this, the major averages saw weekly gains, with the Dow adding 0.34%, the S&P 500 up 0.84%, and the Nasdaq jumping by 3.09%, marking Wall Street’s 10th winning week in the last 11.

Encouraging news on inflation arrived on Friday, with producer prices dropping 0.1% in December, offsetting slightly higher consumer inflation data for the same month reported on Thursday. This has led some analysts, including Bill Adams, chief economist for Comerica Bank, to suggest that the path is clearing for the Federal Reserve to consider interest rate cuts in 2024 and to slow the pace of balance sheet reduction.

As a result of this news, the yield on the 10-year Treasury eased to 3.94%, down from nearly 4%, and the two-year Treasury yield, tracking expectations for the Fed, fell to 4.17% from 4.27% before the release of the producer price index (PPI) data. However, the focal point of activity was in Tokyo, where the Nikkei surged by 1.5% on Friday and 6.6% over the week, reaching new 36-year highs. This was attributed to sustained high inflation and the yen’s continued ease against the greenback, traditionally stimulating the exporter-dominated Japanese market.

European shares experienced a 0.2% rise, but Chinese shares fell by 1.3%, reflecting ongoing concerns about the strength of the Chinese economy. Bond yields fell in the U.S., Japan, and Australia, while rising in the UK and Germany. Surprisingly, the oil price fell despite escalating turmoil in the Middle East.

Looking ahead, the ASX is anticipated to open flat on Monday, with little assistance from the U.S. markets on holiday, causing traders to approach pricing cautiously. Friday’s Share Price Index closed with a minimal gain of 5 points, following a 7.7-point loss in the local session, reflecting a lack of enthusiasm. Over the week, Australian shares rose marginally, influenced by lower-than-expected inflation. However, the ASX saw declines in utilities, materials, and consumer staples, offsetting gains in IT, real estate, and consumer discretionary shares.

Metal and iron ore prices witnessed a decline, with the latter leading to pressure on shares in BHP, Rio Tinto, and Fortescue as the SGX price slid close to a 10% decrease in 10 days. The SGX futures price closed at $US129.60 on Friday, falling by $US13 a tonne from the January 3 peak. The sell-off occurred despite confirmation that Chinese iron ore imports exceeded 100 million tonnes in December for yet another month, rising 6.6% over the year to a record 1.179 billion tonnes. Chinese commodity websites, however, suggest an oversupply situation due to rising portside stocks ahead of the Lunar New Year break in early February.

In response to these market dynamics, BHP shares fell by 2.8% over the week, Rio shares ended down by 2.3%, and Fortescue shares slipped by 2.7% over the five sessions, despite a solid rise on Friday. The Australian dollar fell by 0.3% over the week to end around 66.80 US cents, despite little change in the value of the greenback.