Financial Markets’ Weekly Recap, Nov. 27 – Dec. 1

Gold prices surged to a six-month high in current trading, driven by the decline of the US dollar and the belief that the Fed is ending its interest rate hike cycle, contributing to the positive momentum in the precious metal.

Gold’s Performance

Gold prices surged to a new multi-month high of $2060.62 following Fed Chair Jerome Powell’s speech. Gold’s attractiveness as a hedge is heightened by Powell’s comments on weak inflation data and high core inflation. US interest rate expectations include nearly 135 basis points of Fed rate cuts by the end of 2024. Gold price extended to a new seven-month high in the mid-North American session after Powell welcomed soft inflation data, but stressed core inflation remains too high.

Powell’s Remarks

Fed Chair Powell praised bullion traders for taking advantage of XAU/USD’s dip to $2044.50, leading to new day and multi-month highs. US Treasury bond yields are dropping, with the 10-year benchmark note coupon dropping six and a half basis points at 4.263%. This has a tailwind for gold prices, and the US dollar tumbled 0.24% at 103.26. Money market futures show investors have ended close to 135 basis points of Fed rate cuts for the end of 2024.

PMIs

The Manufacturing PMI for November, released earlier on Friday by the Institute for Supply Management (ISM), indicated that business activity is still contracting for the thirteenth consecutive month. In line with the most recent data on unemployment claims, manufacturer prices increased as the employment index decreased.

US Stocks

Stocks have been on a comeback tour in 2023, gaining significantly since a poor 2022. The latest leg of this tour has been particularly enthusiastic, with the market closing the year on a banner November. The strong November run was supported by favorable news in all the right spots, such as lower inflation trends, the Fed signaling it doesn’t have to keep tightening policy, the economy defying high interest rates, and better corporate earnings. The November rally has a backbone, and while the market may slouch occasionally as 2024 approaches, with stocks nearing their highs for the year, it is expected to close out 2023 with some pep and maintain a good posture next year.

Oil’s Performance

Oil trading ended on Friday in a bearish direction, with US oil futures falling to $74.34 per barrel, while US crude contracts rose to their highest levels at $78.72. Brent crude futures fell to $79.10 per barrel before the last daily close, while British crude reached its highest levels at $81.50. The Organization of Petroleum Exporting Countries and its allies, led by Russia, the OPEC+ group, did not reach an agreement to further reduce oil production, which harmed global oil prices. Saudi Arabia, the largest oil exporting country in the group, decided to extend the voluntary reduction in its oil output throughout the first quarter of next year after it was scheduled to end in December 2023.

Baker Hughes, a US-based oil field and production site services company, reported that the total number of American drilling rigs for oil and natural gas increased to 612 rigs in the week ending December 1, compared to 621 rigs at the end of last week. The increase in drilling rigs raises concerns about American producers seizing an additional share of the global market at the expense of OPEC countries, which are making efforts to boost prices by reducing production. This threatens to dissipate the hoped-for impact of OPEC+ efforts.

DXY’s Performance

The US Dollar Index has shown a modest decline, trading at 103.15, despite Fed Chair Powell’s hawkish stance. The November ISM Manufacturing PMI came in lower than expected but didn’t trigger significant downward movements in the US dollar.

The Fed’s hawkishness is weakened by markets not buying Powell’s hawkishness. Despite cooling inflation and a mixed trend in the US labor market, the Fed is less dovish and maintains an open stance toward further policy tightening. The ISM Manufacturing PMI reported by the Institute for Supply Management marked 46.7 for November, on par with the previous figure while falling short of the anticipated 47.6.

The US will release November’s Nonfarm Payrolls report on Friday, with job creation expected to have picked up while wages are seen decelerating. US bond yields are experiencing a downward trend, with 2-year, 5-year, and 10-year yields standing at 4.57%, 4.16%, and 4.25%, respectively. Market expectations for the December meeting indicate investors do not expect a rate hike, and swap markets are pricing in rate cuts midway through 2024.

Global Stocks

Japan’s Nikkei index fell on Friday, marking its first weekly decline in five weeks, with technology companies’ shares falling due to a rise in bond yields. The technology sector was the only one to fall on the Nikkei, with 97 of 225 stocks declining, 125 rising, and three stabilizing. The broader Topix index rose 0.32 percent today but fell 0.35 percent during the week. Long-term Japanese bond yields rose 3.5 basis points to 0.705 percent on Friday, following an overnight recovery in US Treasury bond yields.

German stocks led gains in Europe on Wednesday, following a decline in inflation in the country’s most populous state, reinforcing expectations that the European Central Bank will cut interest rates next year. The German DAX index rose 1% to touch a four-month high, while European bond yields fell to the lowest level in more than three months at 2.4%. The European STOXX 600 index rose 0.5%, with shares in the interest rate-sensitive real estate sector rising by more than two percent. Traders expect interest rates to be cut by more than 105 basis points in 2024.