US Stocks Surge as Holiday-Shortened Week Ends on a High Note

Key events:

• USA - S&P Global Services PMI (Dec)
• Eurozone - HCOB Eurozone Composite PMI (Dec)

US stocks rallied on Friday, wrapping up a holiday-shortened week and the start of a new year with optimism. Investors were buoyed by expectations of further Federal Reserve rate cuts and the promise of more lenient regulatory policies from the incoming administration. This broad-based upswing saw all three major US indices finish higher, driven by strength in mega-cap growth companies such as Tesla and Nvidia. Their gains propelled the Nasdaq to lead the charge, with the tech-heavy index standing out.

The Dow Jones Industrial Average rose 339.86 points, or 0.80%, closing at 42,732.13. The S&P 500 added 73.92 points, or 1.26%, to finish at 5,942.47, while the Nasdaq Composite climbed 340.88 points, or 1.77%, to reach 19,621.68.

On the other side of the globe, the Australian Dollar extended its gains for a third consecutive session against the US Dollar on Monday. The currency pair AUD/USD appreciated as favorable economic data from Australia and China lent support. The Judo Bank Australia Composite PMI for December 2024 was revised upward to 50.2 from 49.9, signaling modest growth in the private sector. This increase was primarily driven by the services sector, despite continued contraction in manufacturing output. The Services PMI also showed improvement, reaching 50.8 from November's 50.5, marking nearly a year of continuous expansion in the sector.

China's economy, closely tied to Australia's, showed promising signs with the Caixin China Services PMI rising to 52.2 in December from 51.5 in November, surpassing expectations. This indicated the fastest growth in the Chinese services sector since May, providing a positive outlook for Australia's economy given their trade relationship. However, the Caixin Manufacturing PMI dropped unexpectedly to 50.5 from 51.5, missing forecasts. This disparity between manufacturing and services performance in China adds an element of uncertainty to the broader economic outlook.

Australia's economy stands to benefit from China's policies, given their intertwined trade activities. Analysts will closely watch China's next moves to gauge the impact on the Australian Dollar and broader market sentiment.

In Japan, the Yen faced renewed selling pressure as it edged closer to multi-month lows against the US Dollar, influenced by the Bank of Japan's dovish stance and prevailing risk-on market sentiment. The US Dollar strengthened, buoyed by the Federal Reserve's hawkish tone and optimism around expansionary policies expected under the new US administration. Japan's service sector showed positive growth for the second consecutive month in December, alongside a pickup in service-sector inflation, which could pave the way for a BoJ rate hike in January.

The geopolitical environment, combined with the Fed's more assertive stance, has kept the USD/JPY pair under pressure. Market participants are cautious about potential interventions by Japanese authorities to stabilize the Yen. This delicate balance between domestic economic policies and international market trends will continue to shape the currency pair's movements.

The Euro struggled, with the EUR/USD pair sliding to near 1.0300. Market participants focused on upcoming Eurozone economic indicators, including the HCOB Composite PMI and Germany’s CPI data. The European Central Bank is expected to continue its monetary easing path, with multiple rate cuts anticipated this year, contrasting with the Fed's more cautious approach, potentially pushing the Euro towards parity with the US Dollar. Analysts remain skeptical about the Eurozone's ability to meet its inflation targets, adding further pressure on the common currency.

USD/CAD saw its four-day winning streak halt, trading near 1.4400. The Canadian dollar was supported by higher oil prices and reports suggesting Canadian Prime Minister Justin Trudeau's potential resignation. These developments added to the CAD's strength, given Canada’s significant crude exports to the US. West Texas Intermediate (WTI) crude oil approached $73.50 per barrel, reflecting higher demand expectations driven by colder weather and China's economic stimulus measures.

The Federal Reserve's recent stance, suggesting a slowdown in rate cuts, added complexity to the USD/CAD dynamics. The Fed’s outlook remains data-dependent, with critical reports like the FOMC minutes and US labor market data scheduled for release. These will explain the future direction of interest rates and market sentiment, influencing global financial markets as 2025 unfolds. Traders will closely monitor these developments to adjust their strategies accordingly, as market volatility remains high in the early days of the new year.