The bond market rally continued in the past month, with European yields declining substantially. The 10Y Bund yields are currently trading 30-40bp below the levels at the start of the year, and the market is now pencilling in that the ECB will cut policy rates by 150bp next year. Just a few months ago the expectation was for a decline of 65bp. While we consider the fall in yields to be overdone, we concede that both US and European data have brought rate cuts closer. Inflation continues to decline in the Eurozone and the US, with price pressure easing in even the most entrenched elements of the consumer price indices (such as service prices). Underlying inflation also weakening is important for the central banks and clearly had an effect on December's interest rate meetings, where the debate on more rate hikes seemingly evaporated completely. Signs of inflationary pressure easing in the developed economies have left their mark on the rhetoric of those central bankers who until quite recently appeared very much open to further interest rate hikes. Perhaps the most obvious example in the past month was the change in tune from Isabel Schnabel, a key member of the ECB's Governing Council, who essentially took the prospect of more rate hikes off the table when she said: 'When the facts change, I change my mind', a marked shift from her recent hawkish tone. But have the facts really changed sufficiently in just a couple of months to warrant such a drastic repricing of interest rate expectations in the market? We are sceptical, as the sources of inflation outlook uncertainty are essentially still in place. Labour markets in both the US and Europe have proved remarkably robust to the economic weakness we have seen this year, and US economic data, in particular, remain surprisingly resilient to higher interest rates. In our recent economic forecast, Nordic Outlook, 5 December 2023, we expect the global economy to continue to grow below trend in the coming year, as we have not yet experienced the full impact of monetary tightening. However, we are not expecting a crisis. Drop in long yields appears to be behind us As mentioned, our view is that market developments have recently overtaken reality. The roughly 150bp worth of rate cuts priced for next year would require a considerably grimmer economic environment than currently appears to be on the cards. While growth signals in Europe are – admittedly – weak at the moment, we do not envisage a major crisis materialising. European consumers are increasingly benefiting from rising real incomes that are a direct result of accelerating (nominal) wage growth and slowing inflation. This will likely bolster purchasing power in 2024 and support the economy in tandem with high employment and generally high levels of savings. We expect the ECB to cut policy rates by 3x25bp next year, kicking off in June – so, around half of what the market is pricing right now. The ECB's relatively cautious message at its December meeting, balancing the risks with the expected resilient economic outlook, increased the likelihood of rate cuts starting earlier, but regardless of the timing, rate cuts will probably be initiated to ensure a soft landing rather than as a response to a major economic downturn, in our view. We expect the long end of the yield curve to be especially sensitive to any repricing of the rate cutting cycle. This is also linked to a series of market dynamics that helped send long yields considerably higher in the autumn. While the US debt challenges are still daunting, overall government debt issuance in Europe also looks set to remain high in 2024. If markets have to reprice policy rates higher while absorbing an increased supply of bonds, the scene may well be set for greater volatility in bond markets. The term premium on long bonds would be particularly sensitive to this scenario, in our opinion. We still forecast 10Y Bund yields at 2.35% on a 12M horizon compared with a current level of 2%, while we expect US 10Y Treasury yields to rise from currently 3.9% to 4.20%. We look for slightly lower rates and yields at the short end of the swap/government curves on the back of our expectation that the initial round of rate cuts in both the US (100bp) and the Eurozone (75bp) will be delivered by the end of 2024. Download The Full Yield Outlook

The US Dollar gained more than 10% versus the Japanese Yen during 2023, a performance that will be hard to repeat in 2024. The divergence in monetary policy between the Federal Reserve and the Bank of Japan led the pair to test the multi-decade high near 152.00. USD/JPY broke a one-year bullish trend in December after failing to break 152.00, setting a bearish bias for the first quarters of 2024. Yen bulls have hope in the Bank of Japan, while US Dollar buyers rely on the US economy. The United States Dollar (USD) had a mixed performance during 2023, supported mainly by the robust US economy and limited by the rally on Wall Street. On the other hand, the Japanese Yen (JPY) went from verbal intervention aimed at limiting its depreciation to rally on every speculation and rumor regarding a potential shift in the Bank of Japan's (BoJ) ultra-loose monetary policy. However, these expectations faded as the BoJ clarified that it is still far from implementing any changes. In December, the Yen experienced a recovery as markets perceived that the Fed would not raise interest rates further, and there were comments about an exit strategy at the BoJ. As a result, the Japanese currency is ending 2023 with positive momentum against the US Dollar. This is similar to what happened in 2022 when USD/JPY dropped after establishing a new multi-decade high near 152.00. In 2023, the pair also retreated from 152.00, but at a more moderate pace. Federal Reserve rate hike cycle ends, US yields change trend after hitting multi-year highs During 2023, inflation in the US continued to trend lower, retreating from the peak above 9% in 2022. The annual inflation rate bottomed in June at 3.0% and then rebounded moderately but resumed its downward trend. This decline is expected to continue toward the Fed's objective as monetary tightening takes effect and the US economy slows down. The deceleration in inflation alleviated the need for the Fed to raise interest rates further. The fed funds rates rose in 2023 from 4.25%-4.50% to 5.25%-5.50%, reaching the highest level in 22 years and completing the most aggressive tightening cycle in four decades with a cumulative 525 basis points of rate hikes. US Treasury yields reached their highest point in October but began to decline as evidence suggested that inflation was being brought under control, although still above the target. This decline in yields was also influenced by indications of a more balanced labor market. In October, the US 10-year yield reached levels above 5%, the highest since 2007. This marked the highest point, along with the peak of the United States Dollar Index (DXY). During this time, the USD/JPY pair tested the 152.00 zone in October and again in November, marking the last time it reached that level and then started to correct to the downside.  Just minor changes at the Bank of Japan The change in leadership at the BoJ in April, when Kazuo Ueda replaced Haruhiko Kuroda as governor, did not result in policy alterations. Although there were initial considerations of a potential shift toward a less dovish stance, there were no changes. What remained consistent was the impact on the Japanese Yen of rumors and speculations about a possible policy shift, causing temporary boosts but fading as the market returned to the understanding that the BoJ remained firmly committed to its ultra-loose monetary policy. The BoJ maintained its target of -0.1% for short-term interest rates. Regarding its Yield Curve Control (YCC) policy, it kept the 10-year government bond yield around 0%. The BoJ introduced only minor tweaks to its YCC policy, loosening its grip on long-term rates. At the November meeting, the BoJ "regarded the upper bound of 1.0 percent for 10-year Japanese Government Bond (JGB) yields as a reference in its market operations." The 10-year yield approached 1%, a level not seen since 2013, prompting intervention from the BoJ through unscheduled bond purchases to maintain control over yields.  In Japan, inflation, as measured by the annual Consumer Price Index (CPI), slowed in January from above 4% to average 3.3% in 2023. Despite inflation staying above the BoJ's target and higher than the average of the previous decades, the central bank did not make relevant changes to its ultra-loose monetary policy. The divergence in monetary policies between the United States and Japan remained a supportive factor for USD/JPY throughout the year, reflected in the difference in government bond yields. However, as many analysts forecast, this situation could change in 2024 if the Fed cuts rates and the BoJ finally lifts.  A good year on Wall Street  US equity prices are about to end the year with significant gains. By mid-December, the Dow Jones was up by 10%; the S&P 500, by 20%; and the Nasdaq, an impressive 35%...

The last PCE print for the US was perfect. Core PCE, the Federal Reserve's (Fed) favourite gauge of inflation, printed 0.1% advance on a monthly basis – it was softer than expected, core PCE fell to 3.2% on a yearly basis – it was also softer than expected, and core PCE fell to 1.9% on a 6-month basis, and that's below the Fed's 2% inflation target.   Normally, you wouldn't necessarily cheer a slowdown in 6-month inflation but because investors are increasingly impatient to see the Fed cut its interest rates, all metrics are good to justify the end of the Fed's policy tightening campaign. So here we are, cheering the fact that the 6-month core PCE fell below the Fed's 2% target in November. The US 2-year yield is preparing to test the 4.30% to the downside, the 10-year yield makes itself comfy below the 4% mark – and even the 3.90% this morning, and the stocks joyfully extend their rally. The S&P500 closed last week a few points below a ytd high, Nasdaq100 and Dow Jones consolidated near ATH levels and the US dollar looks miserable. The dollar index is at the lowest level since summer and about to step into the February to August bearish trend.   There is not much data left to go before this year ends. We have a light economic calendar for the week, and the trading volumes will be thin due to the end-end holiday.   Morning notes from a slow morning  Major central banks reined in on inflation in 2023 – the inflation numbers are surprisingly, and significantly lower than the expectations. Remember, we though – at the start of the year - that the end of China's zero-Covid measures was the biggest risk to inflation. Well, we simply have been served the exact opposite: China's inability to rebound, and inability to generate inflation simply helped getting the rest of us out of inflation. China did not contribute to inflation but to disinflation instead.  The Fed sounds significantly more dovish than its European peers – even though inflation in Europe and Britain have come significantly down, and their sputtering economies would justify softer monetary policies, whereas the US economy remains uncomfortably strong. Released last Friday, the US durables goods orders jumped 5.4% in November! The diverging speed between the US and the European economies makes the policy divergence between the dovish Fed and the hawkish European central banks look suspicious. Yes, the EURUSD will certainly end this year above that 1.10 mark, nonetheless, the upside potential will likely remain limited.   Elsewhere, everyone I talk to is short USDJPY, or short EURJPY, or GBPJPY. But the bullish sentiment in the yen makes the yen stronger and a stronger yen will help inflation ease in Japan, and slow inflation will allow the Bank of Japan (BoJ) to remain relaxed about normalizing policy. And indeed, released this morning, the BoJ core inflation fell more than expected to 2.7%. Bingo! Therefore, it looks like the USDJPY's downside potential may be coming to a point of exhaustion near the 140 – in the absence of fresh news.   In energy, oil is having such a hard time this year. The barrel of American crude couldn't break the $74pb resistance and there is now a death cross formation on a daily chart. Yet the oil bulls have all the reasons on earth to push this rally further: the tensions in Suez Canal are mounting, the war in the Middle East gets uglier, Iran looks increasingly involved in the conflict, OPEC restricts production, and central banks are preparing to cut rates. But interestingly, none has been enough to strengthen the back of the bulls. Failure to clear the $74/75 resistance will eventually weaken the trend and send the price of a barrel below $70pb. If that's the case, there will be even more reason to be confident about a series of rate cuts next year.  

Gold price snaps a three-day uptrend near $2,070 early Wednesday. The US Dollar finds its feet amid sluggish US Treasury bond yields, a mixed mood. Gold price faces a stiff hurdle at $2,079, a brief pullback cannot be ruled out. Gold price has returned to the red for the first time in four trading days on Wednesday, pulling back slightly from two-week highs of $2,071 set on December 22. Gold price eyes a fresh catalyst amid thin trading Gold price is catching a breather, as the US Dollar (USD) is finding its feet due to a cautious market mood, despite a sluggish performance seen in the US Treasury bond yields. Investors catch up on their trades, as well as, on the latest macroeconomic developments following the Christmas holiday break, keeping themselves away from any fresh directional bets. Additionally, muted activity on the US Federal Reserve (Fed) interest rate cut bets for next year also leaves Gold buyers in limbo. Gold price was on a three-day uptrend, backed by increased expectations of Fed rate cuts in 2024. Markets are currently pricing in a 79% chance of a rate cut starting in March 2024, according to the CME FedWatch tool, with as much as 153 basis points (bps) of cuts priced in for next year. The dovish sentiment around the Fed policy pivot gathered strength after data from the Commerce Department showed Friday that the Fed's preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, rose just 0.1% in November and was up 3.2% from a year ago. The data sent the US Dollar Index to a fresh five-month low of 101.43 while the US Treasury bond yields challenged multi-month lows, with the benchmark 10-year US Treasury bond yields currently gyrating at around 3.85%. Looking ahead, Gold investors will trade with caution, as full markets return but pre-New Year curtailed week will continue to see muted volumes. Thin liquidity conditions could leave Gold price subject to intense volatility. The US docket on Wednesday will feature the low-impact Richmond Fed Manufacturing Index, with all eyes on the Wall Street sentiment. Gold price technical analysis: Daily chart Technically, nothing seems to have changed for the Gold price, as the path of least resistance still appears to the upside. The 14-day Relative Strength Index (RSI) indicator continues to hold above the midline, backing the bullish potential. However, the latest downtick in the RSI indicator indicates the pullback in Gold price could extend toward the 21-day Simple Moving Average (SMA) at $2,032. Ahead of that, the $2,050 round figure will challenge the bullish commitments. On the upside, a sustained break above the rising trendline resistance at $2,079 is needed to resume the recovery momentum toward the $2,100 psychological level. Further up, Gold buyers would target the all-time highs of $2,144.

EUR/USD and SPX 500 trade patterns from 2021 to 2003 ran simultaneous as 8 up months Vs 4 down months. The pattern turned slightly in 2020 as 6 up months for SPX to 6 down months as EUR/USD traded 7 up months to 5 down. In 2019, the EUR/USD and SPX patterns completely deviated as SPX traded 10 up and 2 down while EUR/USD traded 5 up months to 7 down. From 2015 to 2018, EUR/USD and SPX returned to a 1 and 2 month lead and lag time to up and down months. In 2018, SPX traded 8 up months to 4 down while EUR/USD resulted in 6 up to 6 down. In 2017, SPX traded 10 up months to 2 down and EUR/USD 9 up to 3 down. The SPX and EUR/USD relationship in 2016 deviated to a 2 month lead and lag by SPX 7 up months to 5 down and EUR/USD5 up to 7 down. In 2015, SPX and EUR/USD  returned to the 1 month lag seen in 2020 and 2017 as SPX traded 5 up months to 7 down while EUR/USD resulted in 4 up months to 8 down. The week EUR/USD for the week approaches 2 big levels at 1.1055 and 1.1057. EUR/USD overall range trades 204  pips from 1.1057 to 1.0853. EUR/USD larger range to hold for next months is found at 1.0592, 1.0685, 1.0881, 1.1057, 1.1273, 1.1521. EUR/USD trade deeply overbought from 1.0800's and lower averages and targets 1.0898 and 1.0871. USD/JPY and JPY cross pairs trade massive oversold and USD/JPY targets lower 144.00's. Overbought GBP/USD trades 220 pips from 1.2563 and 1.2578 to 1.2783. AUD/USD for next months trades 0.6611, 0.6772, 0.6949, 0.7226 and 0.7449. AUD/USD averages are located bout every 200 pips and offers an excellent weekly trade plan over next months. NZD/USD trades overbought and just above its vital break line at 0.6273. A break lower places NZD/USD in a range from 0.6126 to 0.6273. Upon a correction, a higher NZD/USD above 0.6273 places the new range at 0.627 to 0.6460. USD/CAD trades 1.3211 to 1.3320. EUR/CAD averages are many and massive from 1.4500's to 1.4400's. GBP/CAD trades deeply oversold. GBP/CAD in the CAD category is the only trade worth the trouble as GBP/CAD ranges are wide in comparison to EUR/CAD, AUD/CAD and NZD/CAD. EUR/AUD and GBP/AUD both trade oversold. EUR/AUD trades just above vital lines at 1.6087 and 1.5937. GBP/NZD and EUR/NZD trade oversold as all wide rangers trade oversold and in contention to overbought anchor pairs. EUR/NZD trades just above 1.7369 and 1.7148. Recall the700 and 800 pip  long term trades for wide range currencies. Once targets completed, prices became settled into dead ranges. Wide rangers maybe oversold currently but all also trade in dead ranges. The 2 year cycle highlighted in the beginning of the year is only 1 year into the 2 year cycle. Prices in 2024 will build again in order to trade many more 700 and 800 pip trades easily and effortlessly. Until then, we are forced to work for the money. EUR/CHF, GBP/CHF and CAD/CHF trade deeply oversold and matches oversold to USD/CHF.

Markets Wall Street launched the final week of 2023 on a positive trajectory, extending the year-end rally that positioned the market on the verge of achieving a record high. And holding true to its historical form, the" Santa Claus rally" marches on as more dry powder enters the picture. A moderation in headline and core inflation has created a pathway for central banks to ease off on restrictive policies. As inflation subsides, the Federal Reserve sees higher real rates becoming increasingly economically unfavourable, possibly reducing the necessity for policy rates to remain in prohibitive territory. Despite the resilience of U.S. growth, there are indications of deceleration and vulnerability in crucial sectors. While several Fed speakers have tried to temper enthusiasm for rate cuts before Christmas, markets still see the March meeting as a possibility for the first move lower. Some investors anticipate a later timeline, but positive inflation results support the notion of earlier rate cuts. As 2023 concludes, many investors consider it a closed chapter, and for others who are still playing, there's nary a persuasive sell signal in the tea leaves. Even with Mega Tech concentration risk hiding in plain sight but with yields still on an arc lower, it's a challenge for the bears to drum up enough muster to take on the bulls. The endurance of positive sentiments regarding potential Federal Reserve rate cuts in the new year remains an open question that may find resolution with the early 2024 reading on U.S. Non-Farm Payrolls. Undoubtedly, 2023 has proven to be a favourable year for stocks, challenging pessimistic recession predictions from some Wall Street skeptics. A surprising turn of events deviated from expectations, as the potential impact of AI emerged as a significant force countering the drag from aggressive monetary tightening. In stark contrast to the preceding year, 2023 exhibited a remarkable transformation. The November/December "everything rally" played a pivotal role, marking a period in which various assets experienced commendable gains. This achievement is noteworthy, especially considering that cash emerged as one of the preferred asset classes. Approaching 2024, a paramount question for market participants revolves around the fate of the $5-6 trillion currently residing in money market funds. The decision on how this substantial sum will be deployed or invested represents the multi-trillion-dollar question influencing the stock market dynamic to herald in a record-setting print to open the new year for the S&P500, that's if we don't hit it this week. Oil market Oil prices continued to rise due to a significant uptick in geopolitical risk after Iran vowed retribution following the killing of Senior Islamic Revolution Guard Corps (IRGC) commander Mousavi in an Israeli airstrike in Syria's Damascus. Warplanes struck three Kataib Hezbollah targets after U.S. bases in Kurdistan were targeted in retaliation and sending a clear signal to Tehran. With tensions escalating in the Middle East, any plans to resume shipping in the Red Sea soon might be misplaced. The conflict in Gaza has taken on a regional dimension. Daily attacks against U.S. targets in Iraq and Syria are occurring, as Iran and its allies perceive the U.S. as complicit with Israel. Incidents have also occurred between Israel and Hezbollah in Lebanon, and the Houthis in Yemen are involved. The Houthis, equipped with ballistic missiles, cruise missiles, and UAVs, strategically control the Bab el-Mandeb Strait, a vital global trade route. They have disrupted maritime traffic by seizing and attacking ships. However, skepticism exists about the conflict escalating into a full-scale regional war, likely limiting oil prices from pushing considerably higher.