Market Rebound Led by Cyclical Stocks as Tech Faces Headwinds | Daily Market Analysis

Key events:

• USA - FOMC Member Williams Speaks
• USA - PPI (MoM) (Dec)

The S&P 500 managed to close higher on Monday, recovering from earlier losses as a surge in cyclical stocks, notably in the energy sector, provided a cushion against the downturn in growth stocks like technology. The market's focus shifted as investors grappled with the implications of a potential Federal Reserve pause ahead of critical inflation data set to be released soon.

The Dow Jones Industrial Average climbed 355 points, or 0.9%, while the S&P 500 edged up 0.2%. However, the NASDAQ Composite dipped by 0.4%, primarily dragged down by weakness in the tech sector. The move out of growth stocks and into cyclicals reflects mounting investor concerns over the possibility of higher interest rates persisting for a longer period.

Semiconductor stocks, including NVIDIA Corporation (NASDAQ: NVDA), were among the most notable losers, pulling down the broader tech sector. This decline came after the White House announced new regulations on the export of AI chips to certain adversarial nations, including China, exacerbating the pressure on tech stocks.

Broader concerns about the Federal Reserve's potential to maintain a prolonged pause on rate cuts further dampened sentiment in the tech sector. Treasury yields continued to rise, with some Wall Street analysts now expecting just one rate cut this year as fears of entrenched inflation linger.

The currency markets also reflected the broader economic uncertainties. The GBP/USD pair snapped a five-day losing streak, rebounding from its 15-month low of 1.2099. By Tuesday’s Asian trading session, the pair held above 1.2200, driven by a slight improvement in investor confidence in the British Pound.

However, the potential for further gains in the GBP is tempered by ongoing concerns about stagflation in the United Kingdom. Persistent inflation coupled with stagnant economic growth continues to cloud the UK's economic outlook, and rising government bond yields have heightened worries about the nation’s fiscal stability. This has led to increased selling of UK gilts, reflecting investor unease about the country's mounting debt and inflationary pressures.

The Japanese Yen saw some intraday selling on Tuesday, ending a three-day winning streak against the US Dollar. Comments from Bank of Japan Deputy Governor Ryozo Himino created additional uncertainty regarding the timing of future rate hikes, which added to the Yen's weakness. A shift toward risk-on sentiment, sparked by reports that the incoming US administration may take a gradual approach to implementing tariffs, further undermined the safe-haven Yen.

The Federal Reserve’s hawkish stance from December has reduced hopes of a narrowing US-Japan yield differential, another factor weighing on the Yen. The USD/JPY pair, which had retraced from a multi-month high, found some support near the 158.00 mark. Yet, a modest pullback in US Treasury yields, coupled with easing fears of trade disruptions under the new US administration, capped further advances in the pair.

Meanwhile, the Australian Dollar extended its gains against the US Dollar for a second straight day on Tuesday, recovering from its lowest level since April 2020 at 0.6131. The AUD/USD pair benefitted from stronger commodity prices, which provided support for the Australian currency. The S&P/ASX 200 Index also rose by 0.2%, halting a three-day losing streak as mining and energy stocks led the recovery. Australian markets were buoyed by positive momentum from Wall Street, where investors shifted their attention away from megacap tech stocks to other sectors.

However, persistent concerns about consumer confidence in Australia weighed on sentiment. The Westpac Consumer Confidence Index recorded a second consecutive monthly decline, falling by 0.7% to 92.1 points in January 2025, reflecting ongoing pessimism among consumers. Market participants are now pricing in a 75% likelihood of a rate cut by the Reserve Bank of Australia next month, which is expected to put downward pressure on the AUD/USD pair.

Adding to the AUD’s resilience, recent stimulus measures from China provided some support. Given the close economic ties between Australia and China, any changes in China’s economic landscape could have significant repercussions for Australian markets.

In contrast, the Euro continued to struggle, with the EUR/USD pair exploring lower levels, hitting the 1.0200 handle for the first time since late 2022. The pair marked a fresh 26-month low before attempting a modest recovery later in the day. European economic data has remained subdued, and the European Central Bank is anticipated to continue its rate-cutting trajectory, further widening the interest rate differential between the Euro and the US Dollar.

In the US, the economic calendar is set to provide more clarity on inflation trends. The Producer Price Index (PPI) is expected to show a year-over-year increase to 3.7% in December from the previous 3.4%. Meanwhile, Consumer Price Index (CPI) data, scheduled for Wednesday, is forecasted to edge up to 2.8% from 2.7%, with retail sales figures due later in the week, providing further insights into consumer spending and economic resilience.