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In a session marked by signs of year-end investor fatigue, U.S. stocks managed to eke out slight gains on Wednesday, with subdued trading and a lack of significant market-moving news. The S&P 500 ended 0.3% below its record closing high of 4,796.56 on Jan. 3, 2022. The Dow notched a new record closing high.
The three primary U.S. stock indexes experienced fluctuations, alternating between modest gains and losses before closing in positive territory. Despite the day’s mixed performance, all three U.S. indices are poised for monthly, quarterly, and annual gains.
The proximate market driver was a steep fall in the pivotal benchmark 10-year U.S. yield. Following a positive reception for Tuesday’s two-year sale, the auction of $58 billion in five-year notes on Wednesday received favourable attention, considering the prevailing market holiday condition and setting the week up for a clean sweep if all goes well with Thursday’s 7-year note auction.
The period between Christmas and New Year’s is not typically known for a significant influx of market-moving news; however, the Treasury rally on Wednesday, supported by the success of the five-year stop-through, carried notable weight and saw 10s richer by almost 10 bps, with yields slipping below 3.80%, the lowest since July.
The recent surge in buying activity in stocks and bonds is primarily linked to the widespread anticipation of lower yields in 2024, propelled by the expected rate cuts from the Federal Reserve. However, a significant unresolved aspect is the market’s pricing of these rate cuts, which appears notably more aggressive than indicated in the December dot plot.
While flashes of uncertainty and indecision dotted the New York session, the fall in U.S. yields may give investors more confidence to hold the bullish course through year-end. Still, it will most certainly hold the short sellers at bay, who remain frustrated to the nth degree.
If nothing else, after the tumultuous year we have gone through, especially in the rates markets, it’s astonishing that 10-year yields are trading nearly on top of the 2022 closing levels.
Forex market
Not that I disagree with the direction of travel, but the overnight sell-off of the U.S. dollar driven by the auction pass-throughs was likely exacerbated by holiday-thin liquidity. Still, some significant and noteworthy levels were breached.
USDJPY is again trading south of 142 while the EURUSD broke fresh higher ground above 1.1100, suggesting a March Fed rate cut is becoming more engrained in the Forex market purview.
The JPY holds some real yield appeal here. With 150 bps+ of Fed cuts getting priced in and the end of negative rates in Japan still pinging loudly on the radar, 140 could be tested early in 2024.
Oil market
Oil prices fell as global shipping giants prepared to resume navigation through the Red Sea despite ongoing missile attacks from Houthi rebels. The decision to resume operations reflects a calculated risk, betting on the success of a new multinational maritime task force, Prosperity Guardian, commissioned to safeguard the region.
On Wednesday, Danish shipping company Maersk revealed its intention to resume scheduling vessels for the Suez Canal via the Red Sea in the coming weeks following a temporary pause.
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