Market and Macro Overview for the Week (3rd – 10th Jan 2025)

Macro Trends

Last week presented significant hurdles for assets, with the bond market under pressure from rising deficits, persistent inflation, and solid US economic data. Despite being refuted, European stock markets briefly rallied in anticipation of lower US tariffs. Friday's solid U.S. job data raised the possibility that the Federal Reserve would postpone rate cuts. Wall Street matched this cautious tone, retreating somewhat following earlier gains as markets prepared for next week's US inflation report.

Stock Markets

U.S. equities fell during a week shortened by a market closure on Thursday in honour of former President Jimmy Carter. Small-cap stocks underperformed large-caps for the fifth time in six weeks, and the Nasdaq Composite dropped 2.34%, marking its steepest weekly decline since mid-November. In Europe, the EuroStoxx 50 Index rose 2.17% as investors maintained expectations for an ECB rate cut in January despite rising inflation. Italy’s FTSE MIB led gains with a 2.82% increase, followed by France’s CAC 40 (+2.04%) and Germany’s DAX (+1.55%). The UK’s FTSE 100 Index edged up 0.30%. Meanwhile, Japan's stock markets struggled, with the Nikkei 225 falling 1.8% and the TOPIX Index declining 2.5% as the BoJ and its governor, Kazuo Ueda, maintained their tightening bias and Ueda reiterated that rates will be raised if economic and price conditions keep improving.

Fixed Income and STIRs

The robust U.S. Non-Farm Payroll (NFP) data has led markets to reconsider the need for further central bank rate cuts. According to the CME FedWatch tool, market expectations now anticipate only one additional Fed rate cut in 2025, likely in July, which would lower the fed funds rate to 4.0%–4.25%. Similarly, the probability of a January rate cut by the Bank of Canada has diminished following strong jobs data. U.S. Treasury yields surged, with the benchmark 10-year yield reaching its highest intraday level since November 2023. In the UK, a sell-off in the pound and government bonds pushed the 10-year gilt yield to 4.8%, its highest since August 2008 (Rachel Reeves, aka Liz Truss). The Treasury moved to reassure markets, reaffirming its commitment to fiscal rules amidst financial instability concerns.

FOREX Markets

Last week, the USD and GBP stood out the most in currency markets. The USD gained strength from rising bond yields, robust economic data, and anticipation surrounding Trump’s January 20 inauguration, where he is expected to clarify his tariff strategy. The DXY index illustrates this momentum, climbing from a break above 100.00 in October to nearing 110.00, maintaining a strong upward trend. The GBP, however, faced an adverse reaction despite rising gilt yields. Typically, higher yields in developed countries boost their currencies, but fears of fiscal instability in the UK have created an unusual dynamic of rising yields paired with a weakening pound. In Canada, political uncertainty following Prime Minister Trudeau’s resignation has left the ruling party leaderless until March, with elections unlikely before spring. This creates the potential for CAD weakness, particularly if Trump imposes broad tariffs on Canadian exports after taking office.

Cryptocurrency

Bitcoin fell 3.5% last week, settling near $94,500—$13,500 below its all-time high of $108,000 reached on December 17, 2024. The decline reflects reduced expectations of an imminent U.S. interest rate cut, as strong employment data suggests the Federal Reserve may delay further easing. Historically, Bitcoin has performed best in low-rate environments, and the current outlook is driving investors away from risky assets, with cryptocurrencies among the hardest hit. Crypto markets are now focused on the upcoming inauguration of President-elect Trump on January 20. While his appointments of crypto-friendly figures, such as Paul Atkins to lead the SEC and David Sacks as a crypto advisor, have generated optimism, doubts remain about how quickly a supportive regulatory framework for cryptocurrencies can be established.

Commodities & Energy

Oil prices rose for the third consecutive week, driven by a cold snap in the U.S. that boosted demand for heating fuel and increased prices for both U.S. LNG and its oil substitutes. The frost, extending to production areas like Texas, could also disrupt supply. Adding to market tensions, the Trump administration signalled a tougher stance on Iran, with potential sanctions on Iranian oil under consideration. Despite a stronger dollar and concerns over U.S. protectionism, industrial metal prices rebounded, buoyed by optimism about Beijing's ability to stimulate its economy and support its real estate sector in 2025. Meanwhile, gold rallied, showing resilience against rising bond yields.

What to watch next week

MON - US NY Fed SCE, Chinese Trade Balance / Speakers: ECB’s Lane TUE - US PPI, Japanese M2 Money Supply, EIA STEO, Fed Discount Rate Minutes / Speakers: BoJ’s Himino, Ryozo; ECB’s Lane; BoE’s Breeden, Taylor; Fed’s Schmid, Williams WED - German Wholesale Price Index, Full Year GDP, UK CPI, EZ Industrial Production, US CPI, IEA OMR, Fed Beige Book; OPEC MOMR / Speakers: ECB’s Lane, de Guindos; Fed’s Barkin, Kashkari, Williams, Goolsbee THU - Australian Jobs, UK GDP, US Jobless Claims, Philly Fed Index, Retail Sales, ECB Minutes; NBP Policy Announcement / Speakers: BoC’s Gravelle FRI - Chinese Retail Sales, GDP, UK Retail Sales, US Industrial Production / Speakers: ECB’s Cipollone

MARKETS WEEKLY PRICING COMPARISON