Tech Stocks Stumble Amid Rising Yields, Currency Trends in Focus | Daily Market Analysis

Key events:

• USA - Chicago PMI (Dec)

The S&P 500 managed to end the week on a positive note despite a dip on Friday, as technology stocks led the decline under pressure from rising Treasury yields. On Friday, the S&P 500 dropped 1%, the NASDAQ Composite fell 1.5%, and the Dow Jones Industrial Average declined 0.8%, losing 325 points overall.

Apple Inc. (NASDAQ: AAPL) retreated 1.3% after reaching a record high the previous day, boosted by an upgrade from Wedbush. Meanwhile, Tesla Inc. (NASDAQ: TSLA) slid 5%, and NVIDIA Corporation (NASDAQ :NVDA) eased 2.2%, as tech stocks broadly faced selling pressure. Alphabet Inc. (NASDAQ: GOOGL) also dropped over 1%, reflecting a broader rout in the tech sector.

The tech selloff coincided with a surge in the benchmark 10-year Treasury yield, which climbed to 4.64%, its highest level since early May. The increase reflects expectations of a more hawkish Federal Reserve in 2025 amid persistent inflation concerns.

In currency markets, the AUD/USD pair held near 0.6220 during the early Asian session on Monday, but further gains may be limited as traders digest the Federal Reserve's hawkish tone. This stance has bolstered the US Dollar, creating a headwind for the Australian Dollar. Additionally, the Reserve Bank of Australia signaled a dovish outlook in its December meeting minutes, with policymakers noting progress in managing inflationary pressures. Traders have priced in a 65% probability of a 25-basis-point rate cut at the RBA’s February meeting, with expectations for a cut by April, further weighing on the AUD.

The Japanese Yen remained firm against the US Dollar, keeping the USD/JPY pair subdued. The JPY strengthened after the Tokyo Consumer Price Index (CPI) showed inflation rising to 3.0% year-over-year in December, up from 2.6% in November. Core CPI metrics also indicated persistent inflationary trends, bolstering speculation that the Bank of Japan may raise interest rates in January. Meanwhile, Japan’s Jibun Bank Manufacturing PMI improved to 49.6 in December, up from 49.0 in November, though it remained in contraction territory for the sixth consecutive month.

On Monday, the Nikkei 225 dipped to around 39,950, snapping a two-day rally. The decline mirrored weaker US futures following Friday’s selloff on Wall Street, driven by rising Treasury yields and signs that the Federal Reserve could maintain a restrained approach to rate cuts in 2025.

In the UK, the GBP/USD pair extended its recovery to approximately 1.2580 during early Asian trading on Monday. However, divisions within the Bank of England’s Monetary Policy Committee about the necessity of rate cuts highlighted uncertainties in the UK economy. The BoE opted to hold interest rates steady at 4.75% in its December meeting but hinted at a gradual approach to reducing rates in the future. BoE Governor Andrew Bailey emphasized caution, noting that heightened economic uncertainty limits the bank’s ability to commit to a specific timeline for rate cuts, which could weigh on the Pound against the US Dollar.

The EUR/USD pair extended its rally for a third consecutive session, trading around 1.0430 during early Asian hours. Gains were supported by comments from European Central Bank Governing Council member Robert Holzmann, who suggested that further rate hikes were unlikely despite recent inflation data. However, the pair's upside may be capped as markets continue to evaluate the Federal Reserve's hawkish signals.

The Fed's recent decision to cut interest rates by a quarter point, coupled with projections for two additional rate cuts next year, reflects a cautious stance. Fed Chair Jerome Powell emphasized this approach, reinforcing the US Dollar's strength as a headwind for the EUR/USD. Economists also expect President-elect Donald Trump’s upcoming policies - tax cuts, deregulation, and tariffs - to stoke inflation, potentially prompting the Fed to revise its outlook for 2025.