The Overnight Report: Cautious Start

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The S&P500 rose on Friday for its 57th record closing high this year. Breadth, however, continues to lag with just four of the 11 industry sectors rising.

SPI futures are signalling a cautious start for the local market on Monday morning.

World Overnight
SPI Overnight	8420.00	– 25.00	– 0.30%
S&P ASX 200	8420.90	– 54.00	– 0.64%
S&P500	6090.27	+ 15.16	0.25%
Nasdaq Comp	19859.77	+ 159.05	0.81%
DJIA	44642.52	– 123.19	– 0.28%
S&P500 VIX	12.77	– 0.77	– 5.69%
US 10-year yield	4.15	– 0.03	– 0.69%
USD Index	105.73	0.00	0.00%
FTSE100	8308.61	– 40.77	– 0.49%
DAX30	20384.61	+ 25.81	0.13%

By Chris Weston, Head of Research, Pepperstone

Good morning.

We close out a week where risky assets found buyers ever present, and given the price action, the risk of even higher levels into year-end seemingly probable.

Looking across the key equity indices, the German DAX was the standout long play, with the EU Stoxx, NAS100, and FTSE100 also carving out impressive gains of 3%+ w/w.

While there is increased risk, given the tier 1 economic data points and four central bank meetings this week, pullbacks should be well supported.

We can see clear signs that traders have been keen to add risk, with positioning rotating and hard into growth, high momentum, and high beta plays.

Within the S&P500 sectors, consumer discretionary was best-on-ground, driven by solid moves in Lululemon, Tesla and Amazon, with Comm Services and Tech also attracting the flows. 

Lower quality stocks (higher gearing/weaker balance sheet) and high short interest equity worked well (the Goldman Sachs most short basket closed +7.3% w/w), as the short sellers capitulated, with the S&P500 and NAS100 both hitting yet another all-time high.

In FX markets the USD index (DXY) closed +0.4% for the week, with USDJPY, GBPUSD and EURUSD largely unchanged week-on-week (w/w).

The AUD and BRL were the weakest plays in major FX, with AUDUSD closing at a YTD low.

Gold had a largely uneventful week, closing -0.4% w/w, although news that China bought 160k ounces of gold in November may offer the psychological boost the gold bulls needed.

A big week of event risk to navigate

It will be a lively week ahead with event risk all over the shop.

Looking at the calendar, we see 4 G10 central bank meetings (RBA, BoC, ECB, and SNB), US CPI and PPI, Aussie employment, China CPI, and trade data. In Japan, we get Q3 GDP (final), and the Q4 Tankan report.

Breaking the risk down by region

The US

Friday’s US nonfarm payrolls report was a goldilocks outcome for risk, with the lift in the U/E rate to 4.2% pushing the implied probability of a -25bp cut from the Fed next week to 84%, while the 227k jobs created in November kept concerns of a cooling labour market at bay.

With the Fed looking more closely at the labour market (over inflation), and with recent speeches from the likes of Christopher Waller essentially lowering the bar to a cut next week, this week’s US core CPI print would need to be above 0.4% m/m to have people really questioning a cut next week.

A hot US CPI print may not necessarily derail a cut at next week’s FOMC meeting, but it would affect the level of implied cuts priced for FOMC meetings from March 2025 onwards and this is where the USD may take its directional steer.

We also need to remember that it’s the elements from the CPI basket that feed into the core PCE deflator calculation that are of most interest, as this is what the Fed set policy too.

In this regard, the inputs from the PPI print that also feed into core PCE will also be of importance.

Australia

The RBA won’t cut rates this week, but after last week’s weaker Q3 GDP print, the tone of the statement will be monitored closely.

As new data emerges, the market will massage expectations on whether the RBA commences easing in February or April.

Thursday’s employment report will therefore take on more significance than usual, with a weaker employment print likely pushing the implied probability of a -25bp cut in Feb to around 75%.

AUDUSD closed a YTD low, and rallies will likely be sold on the week with the upside likely capped at 0.6470.

Europe

The ECB will almost certainly cut rates by -25bp to 3% on Thursday (Friday 00:15 AEDT), although one could argue they should cut by -50bp given the recent economic data flow.

The fact we see a small premium for a -50bp cut suggests if we do get a -25bp cut we could see a small positive reaction in the EUR, although the bigger reaction will come from the ECB’s guidance and the appetite for future cuts.

The market continues to look ahead at how far the ECB could take the rates, with the central view that the trough rate in the cycle is closer to 1.75%.

Japan

With the market having reacted to hawkish press reports and paring back expectations of a 25bp hike at next week’s BoJ meeting to a 1-in-3 chance and seeing January as more likely time for a hike.

This week’s Q3 (final) GDP and Q4 Tankan data will need to be significantly strong enough to bring the hike firmly back on the table.

The BoJ will look most closely at the Tankan report and the outlooks offered by large and smaller manufacturing and service enterprises.

They may also want to see the next CPI print, which is due on the 20 Dec and after next week’s meeting.

China

Throughout the week we see China CPI, trade balance, and credit data (new yuan loans, aggregate financing).

We also navigate headlines from China’s Central Economic Work Conference (11-12 Dec), although expectations of any market-moving fiscal policy announcements are low, and authorities will likely bring out the big guns post-tariff negotiations with the Trump Administration.

The central focus will be US CPI, which sets us up for next week’s FOMC meeting, and the major central bank meetings.

On the calendar today:

-Japan 3Q GDP

-China Nov CPI, PPI

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

Corporate news in Australia:

-DAZN reportedly near deal with News Corp ((NWS)) to acquire Foxtel

-Financial Times reports rare whisky auctions tumble as volumes drop -34% and values plunge -40%, hit by inflation, interest rates, and faltering global demand

-Dexus ((DXS)) wants to acquire Campus Living Villages’ Australian student housing portfolio

-Whitehaven Coal ((WHC)) has withdrawn from the bidding process for the Kestrel coal mine, leaving Stanmore Coal ((SMR)) as the leading contender

-Former HSBC wealth and personal banking chief executive Nuno Matos has been appointed to succeed Shayne Elliot as CEO of ANZ Bank ((ANZ)) on July 3

Spot Metals,Minerals & Energy Futures
Gold (oz)	2659.60	+ 5.01	0.19%
Silver (oz)	31.59	– 0.24	– 0.76%
Copper (lb)	4.20	– 0.01	– 0.14%
Aluminium (lb)	1.17	– 0.02	– 1.36%
Nickel (lb)	7.21	+ 0.02	0.32%
Zinc (lb)	1.38	– 0.02	– 1.25%
West Texas Crude	67.20	– 1.27	– 1.85%
Brent Crude	71.12	– 1.08	– 1.50%
Iron Ore (t)	104.11	– 2.18	– 2.05%

The Australian share market over the past thirty days

Index	06 Dec 2024	Week To Date	Month To Date (Dec)	Quarter To Date (Oct-Dec)	Year To Date (2024)
S&P ASX 200 (ex-div)	8420.90	-0.18%	-0.18%	1.83%	10.94%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
29M	29Metals	Downgrade to Sell from Neutral	Citi
		Downgrade to Hold from Buy	Ord Minnett
CKF	Collins Foods	Upgrade to Buy from Neutral	Citi
COS	Cosol	Upgrade to Buy from Hold	Bell Potter
DMP	Domino’s Pizza Enterprises	Downgrade to Underperform from Neutral	Macquarie
GQG	GQG Partners	Upgrade to Add from Hold	Morgans
NST	Northern Star Resources	Downgrade to Neutral from Buy	Citi
SGF	SG Fleet	Downgrade to Equal-weight from Overweight	Morgan Stanley
SSM	Service Stream	Downgrade to Accumulate from Buy	Ord Minnett

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

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