Fed comments heighten rate cut optimism

The US equity market sustained its November rally in the first trading day of December, propelling the S&P 500 and Nasdaq to their highest levels since March 2022.  Investor confidence in receding inflation and the Federal Reserve’s cautious stance fuelled gains, notably in financial shares.  Major benchmarks closed higher, with the S&P 500 and Nasdaq up 0.6%, and the Dow Jones Industrial Average up 0.8%.  Additionally, the 10-year Treasury note yield fell to 4.213%, reflecting ongoing market sentiments.  European markets also extended their gains from November, with the Stoxx 50 rising 0.8% to its highest level since August, fuelled by sharp increases in miners and falling euro zone yields. 

Summary for 04.12.2023 

• Asian markets exhibited mixed performance on Monday as US optimism for an early Fed rate cut conflicted with persistent worries about China’s economic slowdown.  While Australia’s ASX 200 and South Korea’s Kospi rose on hopes of a rate cut, Chinese indices remained lower, with the Shanghai Composite flat, and Hong Kong’s Hang Seng down 0.6% due to mainland equity concerns. 
• European shares are anticipated to edge higher as traders evaluate dovish Fed comments, while US equity futures eased on Monday, as investors await economic data and monetary policy signals. 
• Oil futures fluctuated this morning amid ongoing pressure from the OPEC+ decision and concerns about global fuel demand, with Brent and WTI down roughly 0.6% each.  Geopolitical tensions in the Middle East, particularly the Israel-Hamas conflict, provided some support, but uncertainty over OPEC+ cuts and economic factors kept the market under pressure. 
• Gold prices reached a record high in Asian trade on Monday, driven by market expectations of a potential Federal Reserve interest rate cut as early as March 2024.  The surge in gold prices was fuelled by easing inflation, soft labour data, and signals suggesting the Fed may no long raise rates in December. 
• Fed Chair Jerome Powell stated last Friday that the risks of slowing the economy too much are now “more balanced” with the risks of not raising interest rates enough to control inflation, expressing optimism about the current monetary policy’s progress.  Powell emphasised the Federal Reserve’s cautious approach and the potential for a “soft landing,” indicating that the central bank may not need further rate hikes in the near term.  
• In November, US ETF assets hit a record $7.65 trillion, boosted by investors embracing riskier assets.  High-yield bonds saw a record $11 billion inflow, while ultra-short fixed-income ETFs faced a sentiment reversal, losing $7.1 billion in outflows after earlier attracting $50 billion in assets. 
• Uber Technologies will be added to the S&P 500, effective December 18, as announced by S&P Dow Jones Indices, alongside Jabil Inc and Builders FirstSource Inc, replacing Sealed Air Corp, Alaska Air Group, and SolarEdge Technologies in the benchmark S&P 500. 
• Cantor Fitzgerald initiated coverage on Novo Nordisk with an Overweight rating and a $120 per share price target, expressing optimism about the company’s continued outsized growth, particularly in the obesity market.  The analysts believe Novo Nordisk is well-positioned to benefit from the attractive runway for obesity-related treatments, with annual sales potentially growing to $100 billion over the next 5-7 years. 
• Citi downgraded Spotify to Neutral from Buy, maintaining a $190 per share price target, citing concerns about the risk-reward profile.  The analysts expressed caution regarding expectations of rising Average Revenue Per User (ARPU), continued declines in churn, and potential challenges in Spotify’s model efficiency as growth shifts to less developed markets.  
• Pfizer’s shares dropped over 5% on Friday as the company halted late-stage studies for its twice-daily oral obesity treatment, danuglipron, citing high discontinuation rates due to gastrointestinal side effects.  Pfizer will focus on developing the once-daily oral pill, with data expected in H1 2024, amid growing demand for oral obesity drugs in the pharmaceutical market. 
• Alibaba’s US-listed shares decline 3.2% on Friday to a one-year low, following a Morgan Stanley downgrade on worries about a slower business turnaround.  Meanwhile, PDD Holdings surpassed Alibaba as the most valuable Chinese e-commerce firm, prompting Morgan Stanley to name PDD its top pick due to its adept handling of the economic environment. 
• Worldline shares surged nearly 12% on Friday after reports suggested Credit Agricole was considering acquiring a stake in the French payment processing company to stabilise its struggling payments partner.  The move comes after Worldline’s shares lost over half of their value in October, prompting potential interest from other French financial institutions in Worldline’s future.  
• During the week ending November 29, money-market funds witnessed substantial inflows, with US growth shares receiving their largest influx in 11 weeks, while high-yield bonds saw the largest 4-week inflow since June 2020.  Bank of America noted a +9.6% gain in the 60/40 (shares and bonds) portfolio for November, cautioning that such “monster months” are often followed by pullbacks. 
• In the week ahead, investors will closely watch the US nonfarm payrolls report on Friday to gauge the economy’s resilience amid higher interest rates, while oil prices are expected to remain volatile following skepticism about OPEC+ supply cuts. Additionally, central bank decisions in Australia and Canada, along with Eurozone data and a potential “Santa rally” in global shares, will shape market sentiment throughout the week.