Sydney Market Overview

Asian shares rallied on Monday following a favorable U.S. inflation report, reviving hope for reduced policy tightening next year. Relief spread as Washington avoided a government shutdown.

Market Sentiments

After the recent flurry of central bank decisions, this week appears quieter with only a few meeting minutes expected. No Federal Reserve speeches are scheduled, making U.S. data less critical.

The dollar remains strong, supported by a robust economy and increased bond yields, which negatively impact commodities and gold prices. Emerging market nations face challenges as they attempt to stabilize their currencies to counter inflation risks.

The MSCI Asia-Pacific index, excluding Japan, rose by 0.3%, Japan's Nikkei increased by 0.7%, and South Korea's stocks gained 0.9%.

U.S. futures also saw gains, with S&P 500 futures up by 0.3% and Nasdaq futures increasing by 0.4%. Despite a decline last week of nearly 2% for the S&P 500 and 1.8% for Nasdaq, the latter is still up 30% year-to-date.

Analyst Insights

BofA analysts highlighted that while the S&P 500 is up 23% for the year, excluding the top 12 companies shows a mere 8% gain, signaling potential vulnerabilities as we approach 2025.

The positive performance in Wall Street on Friday was driven by a lower-than-expected core U.S. inflation figure of 0.11%, partially easing worries about the Fed's previous hawkish stance.

Fed fund futures now suggest a 53% chance of a rate cut in March, with a slightly higher 62% for May. Only two quarter-point cuts to a target of 3.75-4.0% are priced for 2025, down from market expectations of rates bottoming at around 3.0% a few months ago.

Currency and Commodity Outlook

Rising bond yields and increased spending expectations pressurize the bond markets, with 10-year yields surging by almost 42 basis points, marking the largest increase since April 2022.

JPMorgan economist Michael Feroli remarked that the core inflation's uptick, alongside rising tariff and immigration concerns, tempered inflation optimism regarding the Fed. They predict a total of 75 basis points in cuts next year, with a pause in January.

The dollar index is near two-year highs at 107.970, gaining 1.9% this month, while the euro is struggling at $1.0432. Since December began, the dollar has risen 4.5% to 156.44, facing potential intervention threats from Japan if it approaches the 160.00 mark.

Gold prices fell by 1% last week due to the strong dollar and higher bond yields, standing at $2,624 an ounce. Additionally, oil prices remain under pressure from concerns over Chinese demand and recent poor retail sales figures. Brent crude is now at $73.00 per barrel, with U.S. crude at $69.58 per barrel.