Dow Hits Historic 40,000 Milestone Amidst Upbeat Earnings and Rate Cut Optimism | Daily Market Analysis

Key events:

• UK - BoE MPC Member Broadbent Speaks
• USA - FOMC Member Bostic Speaks
• USA - Fed Vice Chair for Supervision Barr Speaks
• USA - Fed Waller Speaks
• USA - FOMC Member Mester Speaks

Friday saw the Dow achieving a historic milestone, surpassing 40,000 for the first time ever. This achievement marked a fifth consecutive week of gains, fueled by optimism surrounding potential rate cuts and predominantly positive quarterly earnings reports from corporations, igniting bullish sentiment in the stock market.

The Dow Jones Industrial Average ascended by 135 points, or 0.3%, culminating in a record-breaking closure at 40,003.59. Simultaneously, the S&P 500 experienced a 0.2% increase, while the NASDAQ Composite witnessed a marginal decline of 0.1%.

In Asian trading on Monday, gold prices soared to unprecedented heights, propelled by escalating geopolitical tensions in the Middle East, which amplified demand for safe-haven assets. This surge in gold prices mirrored a broader rally across metal markets.

Reports emerged over the weekend indicating the crash of a helicopter carrying Iranian President Ebrahim Raisi and his foreign minister amid adverse weather conditions on Sunday. Although rescue efforts were underway, Iranian officials warned that their lives remained in jeopardy.

Raisi, viewed as a potential successor to Iran's supreme leadership, was known for his hardline stance on domestic dissent and advocacy for stricter moral regulations.

Gold prices had previously surged to record levels in April amid fears of conflict between Israel and Iran, although such a scenario did not materialize. However, the resurgence of instability in the Middle East reignited demand for the yellow metal.

Meanwhile, Israel continued its airstrikes against Gaza, sustaining tensions in the region. Additionally, escalating military confrontations between Russia and Ukraine further bolstered demand for safe-haven assets, as both nations engaged in strikes against each other over the weekend.

The Australian Dollar continued its upward trajectory for the second straight session on Monday, buoyed by a weakened US Dollar. However, gains in the Aussie Dollar were tempered following China's interest rate decision. The People's Bank of China (PBOC) opted to maintain the one-year and five-year Loan Prime Rates (LPR) at 3.45% and 3.95%, respectively.

Challenges loom ahead for the Australian Dollar, as the yield on Australia's 10-year government bond hovers around 4.2%, marking its lowest point in a month. This decline in bond yields follows a subdued domestic jobs report for the first quarter. Sluggish wage growth has led to market expectations discounting the likelihood of any interest rate hikes by the Reserve Bank of Australia. The first-quarter increase in Australia’s Wage Price Index (QoQ) stood at 0.8%, falling short of the market's projected 0.9% rise and marking the smallest increase since late 2022.

Meanwhile, the GBP/USD pair extended its winning streak for the second consecutive session, trading near 1.2710 during Monday's Asian hours, supported by a weakened US Dollar. April data indicated a slowdown in US consumer inflation to 0.3%, raising anticipation for potential Federal Reserve rate cuts in 2024. However, the US Fed remains cautious regarding inflation and the prospect of rate adjustments in 2024.

According to the CME FedWatch Tool, the likelihood of the Federal Reserve implementing a 25 basis-point rate cut in September has slightly increased to 49.0%, up from 48.6% a week earlier. Such potential monetary policy easing by the central bank could undermine the US Dollar and strengthen the GBP/USD pair.

On Friday, Federal Reserve Board of Governors member Michelle Bowman captured attention by remarking that progress on inflation might not be as steady as anticipated. Bowman emphasized that the temporary decline in inflation observed in the latter part of last year has not seen further improvement this year. Additionally, Richmond Fed President Thomas Barkin noted a moderation in inflation but stressed that it will "take more time" to reach the Fed’s 2% target.

In the United Kingdom, investors anticipate a potential 60 basis points (bps) interest rate cut by the Bank of England in 2024, with the initial cut projected for August. Wednesday's UK CPI data for April, estimated by FactSet, is expected to reveal an annual uptick of 2.7%, significantly influencing the Pound Sterling.

Following the release of March’s CPI data, BoE Governor Andrew Bailey remarked, “Inflation in the UK is expected to converge near its 2% target next month,” noting that inflation has declined roughly in line with the BoE’s February forecast.

Meanwhile, the USD/JPY pair maintained a positive stance for the third consecutive trading day around 155.80 during early Monday's Asian session. The pair's downward movement was supported by weaker Japan's GDP data in the first quarter (Q1).

Later in the day, the Fed’s Bostic, Barr, Waller, Jefferson, and Mester are scheduled to speak. Additionally, the FOMC Minutes are due on Wednesday, with the Japanese National CPI set to take the spotlight on Friday.