Record S&P Close, Bitcoin Milestone, and RBA Decision Preview | Daily Market Analysis

Key events:

• Eurozone - ECB's De Guindos Speaks
• Eurozone - ECB's Elderson Speaks
• Eurozone - ECB's Elderson Speaks
• Eurozone - ECB President Lagarde Speaks
• Eurozone - ECB's Elderson Speaks

On Friday, US stocks experienced a rally, leading to the S&P achieving its highest close of the year. Federal Reserve Chair Jerome Powell's remarks contributed to a positive market sentiment, suggesting that key policy rates have peaked. All three indices marked their fifth consecutive weekly gains. The Dow Jones Industrial Average rose by 0.82%, the S&P 500 gained 0.59%, and the Nasdaq Composite added 0.55%.

In November, the S&P 500 and Nasdaq had their most significant monthly gains since July 2022, and the Dow reached its highest level since January 2022. However, US manufacturing data released on Friday indicated continued contraction due to declining new orders, falling inventories, and labor pressures.

Pfizer (PFE) faced a 5.1% decline as it abandoned plans for a twice-daily version of the oral weight-loss drug danuglipron, impacting its entry into the market.

Alibaba (BABA) also saw a 1.2% dip following a downgrade by Morgan Stanley.

In the realm of commodities, gold prices surged to a record high in Asian trade on Monday. Market speculation about a potential Federal Reserve interest rate cut by March 2024, combined with concerns over an escalation in the Israel-Hamas war following an attack in the Red Sea, contributed to the increased demand for gold.

Federal Reserve Chair Jerome Powell, in his Friday remarks, maintained the view that US rates would remain higher for a prolonged period. However, changes in his signaling, acknowledging progress in curbing inflation and the potential for a "soft landing" for the US economy, reinforced expectations that the Fed might not raise interest rates in December and could potentially initiate rate cuts by March 2024.

CME`s FedWatch Tool indicates a 97.8% likelihood that the Federal Reserve will maintain interest rates in December. This contrasts with a 53% chance of a rate cut in March.

However, financial markets still face numerous economic indicators in the short term. Nonfarm payrolls data for November, a crucial measure of the labor market, is expected later this week, along with inflation readings for the remainder of the year in the coming weeks.

Certain aspects of the labor market remain robust, and inflation continues to surpass the Fed's annual target. If these trends persist, the likelihood of an early rate cut diminishes.

The US dollar began the week with uncertainty on Monday, influenced by cautious statements from Federal Reserve Chair Jerome Powell. Investors awaited a key employment report that could shape the outlook for US interest rates. The US dollar index, tracking the currency against six major counterparts, hovered around Friday's close at 103.28.

Against the yen, the dollar traded at $146.58, rebounding from 146.24 earlier in the session, its lowest since September 11. The yen had previously retreated from its nearly 33-year low of 151.92 per dollar in mid-November.

Currency markets could be influenced by speeches from various European Central Bank officials this week, preceding a deluge of economic data from the region, including revised third-quarter gross domestic product data for the euro bloc on Thursday.

On Monday, Bitcoin surpassed $40,000 for the first time in 2023, buoyed by optimism about the Federal Reserve's early interest rate cut. Attention also remained on the potential approval of a spot exchange-traded fund for the cryptocurrency.

The world's largest cryptocurrency rose 2.7% to $40,521.0, extending gains after a three-week rally. It reached $40,825.0 earlier in the day, its highest level since May 2022. The prospect of lower interest rates is viewed positively for Bitcoin, as easy monetary policy and increased speculative trading contributed to the token's record high of nearly $69,000 in 2021.

Despite doubts about the Securities and Exchange Commission's approval of a spot ETF soon, Bitcoin has more than doubled in value this year. Recent weeks have seen heightened investor speculation about the potential approval of a US ETF directly tracking the cryptocurrency's price.

While crypto proponents believe such approval could attract significant institutional capital into Bitcoin, skepticism remains, considering the waning investor interest in products like the Grayscale Bitcoin Trust (GBTC) over the past year. The Securities and Exchange Commission has given no clear indication of its intention to approve a spot ETF in the near term, although Grayscale won a crucial legal battle against the regulator to secure approval for its spot ETF application.

Apart from that, tomorrow Australia awaits the RBA decision. In its November session, the RBA opted for an interest rate hike, citing persistent inflationary pressures. However, the accompanying statement introduced an element of uncertainty regarding the necessity of another rate increase. Consequently, the Australian dollar experienced a decline, as there was initial confidence in the possibility of an additional quarter-point hike by the turn of the year.

The upcoming RBA decision on Tuesday is likely to result in a status quo, but a clear signal concluding the current hiking cycle is improbable. Officials are expected to maintain the perspective that interest rates could rise further if deemed necessary, potentially supporting the Australian dollar's continued recovery against the US dollar.

However, the trajectory of the Aussie may not be solely dictated by the RBA decision, as Wednesday brings the release of Australia's Q3 GDP data, adding another layer of influence on market dynamics.

Looking ahead to the following week, the Bank of Canada is scheduled for its decision on Wednesday. In the previous meeting, policymakers opted to keep interest rates steady, citing a slowdown in spending and easing price pressures. Despite this, they expressed readiness to increase the policy rate if required.

Recent data, however, have shown a softer economic landscape, with the unemployment rate rising to 5.7% from 5.5% in October, a lower-than-expected employment change, and inflation cooling more than anticipated. Coupled with Thursday's Q3 GDP data indicating economic contraction, investors have priced in approximately 105 basis points of rate cuts by the close of 2024.