Markets Surge on Optimism for Economic Health and Interest Rate Outlook | Daily Market Analysis

Key events:

• USA - Martin Luther King, Jr. Day
• Eurozone - Eurogroup Meetings

US stocks soared on Friday, marking the end of a robust week fueled by optimism surrounding the economy's strength and the future trajectory of interest rates. Investors appeared confident amid expectations of forthcoming policy adjustments under the Trump administration.

The S&P 500 and Dow Industrials posted their most substantial weekly percentage gains since early November, while the Nasdaq experienced its best week since early December. Recent economic data eased concerns about an inflation surge, and growing anticipation that the Federal Reserve may accelerate and expand rate cuts boosted market sentiment.

The Dow Jones Industrial Average increased by 334.70 points, or 0.78%, closing at 43,487.83. The S&P 500 rose by 59.32 points, or 1.00%, to finish at 5,996.66, and the Nasdaq Composite climbed 291.91 points, or 1.51%, to reach 19,630.20.

Throughout the week, the Dow gained 3.69%, the S&P 500 rose 2.92%, and the Nasdaq increased by 2.43%. This momentum reflects the overall bullish sentiment in the market, driven by expectations of favorable economic policies and a stable interest rate environment.

Among notable performers, Nvidia (NASDAQ: NVDA) advanced 3.1%, and Broadcom (NASDAQ: AVGO) gained 3.5% after Barclays raised their price targets, pushing the PHLX semiconductor index up by 2.84%. Intel (NASDAQ: INTC) surged by 9.25% amid takeover rumors.

In the social media sector, Meta (NASDAQ: META) saw a modest increase of 0.24% following the Supreme Court's ruling against TikTok's legal challenge over a potential sale or ban of its app in the US, whereas Snap's shares fell 3.21%.

Across the globe, the Australian Dollar reversed a two-day decline against the US Dollar on Monday, supported by rising metal prices. Nevertheless, gains were capped due to market caution as the USD showed signs of strength ahead of President-elect Donald Trump’s inauguration. The US markets remained closed on Monday for the Martin Luther King Jr. Day holiday.

In China, the People’s Bank of China maintained its Loan Prime Rates (LPRs) at current levels, with the one-year LPR steady at 3.10% and the five-year LPR at 3.60%. This stability, alongside China's robust economic data, positively impacted the AUD. China's GDP grew by 5.4% year-on-year in the fourth quarter of 2024, surpassing expectations of 5%. Retail sales increased by 3.7% in December, and industrial production jumped to 6.2%, exceeding forecasts.

Despite the upbeat data, the Australian Dollar could face challenges as traders anticipate potential rate cuts by the Reserve Bank of Australia  next month. All eyes are now on Australia's upcoming quarterly inflation report for further indications on interest rate directions.

Meanwhile, the Japanese Yen found support from positive Core Machinery Orders data and reversed part of its recent losses against the USD. Japan’s Core Machinery Orders grew 3.4% month-on-month in November 2024, the highest in nine months, reinforcing expectations of a Bank of Japan rate hike during its upcoming policy meeting.

BoJ Deputy Governor Ryozo Himino indicated that a rate hike would be discussed at the January 23-24 meeting amid prospects of sustained wage growth and clearer US policy under the Trump administration.

In Canada, the USD/CAD pair slightly retreated after touching its highest point since March 2020. Despite the dip, signs of waning US inflation have led to increased expectations of Federal Reserve rate cuts, impacting the USD’s strength. Market participants remain cautious, awaiting policy direction under President-elect Trump, particularly concerning inflation and protectionist measures.

Crude oil prices saw some pressure as easing Middle East tensions and potential policy relaxations on Russia weighed on supply concerns. This dynamic, along with general risk-on sentiment, constrained the commodity-linked Canadian Dollar from capitalizing on further gains.

As the market braces for potential policy shifts under the new administration, investors remain vigilant, keeping an eye on macroeconomic indicators and geopolitical developments. The coming weeks will be critical in shaping the trajectory of global markets, with central bank actions and policy decisions likely to influence investor sentiment and market dynamics.