December 27, 2023 – Geopolitical tensions in the Red Sea pushed the price of American crude beyond the critical $74/75pb resistance range, reaching $76pb on Tuesday. Despite the significant issues in the region, market analysts noted a relatively muted bullish reaction, predicting a continuation of the rally at a measured pace. The next focal point for oil bulls is the 200-day moving average (200-DMA) at approximately $78pb, where formidable resistance is expected due to weak momentum.
Market Dynamics Beyond Oil:
In a day characterized by dovish expectations from the Federal Reserve (Fed), US stock and bond markets experienced upward momentum. Investors flocked to US Treasury bond auctions, anticipating rate cuts by the spring. The 52-week bill auction witnessed record demand from indirect bidders, including foreign central banks, signifying expectations of lower yields in the next 6-12 months. The US 2-year yield slipped below 4.30%, while the 10-year yield steadied below 3.90%.
The US dollar faced selling pressure, and gold extended gains as softening US yields reduced the opportunity cost of holding non-interest-bearing gold. The EURUSD continued its ascent above the 1.10 level, fueled by hawkish European Central Bank (ECB) commentaries. However, the Japanese yen‘s rally toward 140 showed signs of short-term exhaustion, with potential implications for the USDJPY in the longer run.
Japanese Equities and the Fed Effect:
A notable observation was the diminishing negative correlation between the Japanese Nikkei and the yen. Despite yen appreciation, Japanese stocks, particularly the Nikkei, continued to attract buyers. Analysts debated whether stock investors were hesitant to price in potential easing from the Bank of Japan (BoJ) or if the dovish winds from the Fed were bolstering global stock markets, benefiting Japanese stocks.
In the US, buyers were poised to propel the S&P500 to a fresh high, with the index trading only 0.5% below its all-time high (ATH). Market optimism, however, faced concerns of being overstretched. Expectations of Fed rate cuts were deemed unfounded, suggesting that while a rate cut might occur, it may not transpire as swiftly as currently priced in. Amidst oversold market conditions, analysts hinted at the possibility of a healthy downside correction once the post-Santa high optimism subsides.
As the year approaches its end, the market anticipates further developments in oil prices, Fed policies, and global equities, with potential corrections looming in the wake of the current optimism.
