Financial Markets’ Weekly Recap

The performance of financial markets exhibited a range of dynamics over the past week. Notably, strength was observed in the performance of oil and the dollar, while gold experienced a marginal decline in its gains. Several key factors acted as primary drivers influencing market movements. Among these, the ongoing Red Sea crisis, Congress successfully averted a government shutdown once again.

Financial markets concluded trading Friday, with a mix of outcomes, witnessing increases in US stocks and gold while observing a decline in both oil prices and the US dollar index.

The S&P 500 index closed the day with a notable 1.23% increase, paralleled by a 1.05% rise in the Dow Jones and a 1.7% ascent in the Nasdaq.

During Friday’s session, the S&P 500 achieved a historic milestone, reaching a record high for the first time in two years. This surge was propelled by advancements in chipmakers and other influential technology stocks, buoyed by optimism surrounding artificial intelligence.

US retail sales exceeded expectations in December, primarily driven by increased car purchases and retailers offering discounts. According to the Commerce Department’s Census Bureau, retail sales rose by 0.6 percent last month. The data for November, initially reported as a 0.3 percent increase, remained unrevised. Economists polled by Reuters had anticipated a more modest rise of 0.4 percent. It’s worth noting that retail sales figures are not adjusted for inflation.

Households maintained a robust pace of spending, thanks to a relatively strong labor market. While spending growth moderated compared to the rapid rate recorded in the third quarter, it was sufficient to allay concerns of a potential recession.

Given the anticipation of the Federal Reserve initiating interest rate cuts in the coming year, most economists express confidence that the economy will steer clear of deflation. The US Central Bank has increased interest rates by 525 basis points since March 2022, reaching the current range between 5.25 and 5.50 percent.

Housing starts in the United States increased by 1.46 million units last December, compared to the prior reading, which indicated a larger uptick of 1.52 million units. Despite this, the monthly surge in new home construction surpassed market expectations of 1.42 million units.

Contrastingly, the change index in the construction of new homes witnessed a decline of -4.3% last month, in opposition to the prior reading, which showed an increase of 10.8%.

US building permits experienced a rise of 1.49 million permits in December, compared to the previous reading of 1.46 million permits, surpassing expectations set at 1.48 million permits.

The weekly unemployment benefits claims decreased to 187 thousand claims in the week ending January 2, down from the previous reading of 207 thousand claims, below market expectations that predicted a level similar to the prior reading.

The total number of beneficiaries of US unemployment benefits also dropped to 1.806 million beneficiaries, compared to the previous reading of 1.832 million beneficiaries, falling below market expectations of a rise to 1.845 million beneficiaries.

Moreover, data from the US Census Bureau released on Wednesday indicated a 0.6% month-on-month increase in US retail sales in December, reaching $709.9 billion. This rise followed the 0.3% increase recorded in November ($706.0 billion) and exceeded market expectations for a 0.4% increase.

The retail sales index, excluding automobiles, rose by 0.4% during the same period, while the retail sales control group increased by 0.8%.

Thanks to this positive data, the dollar index, measuring the performance of the US currency against a basket of major currencies, climbed to 103.54 points.

Shares of semiconductor companies, including Qualcomm (NASDAQ: QCOM), Marvell (MRVL) Technology, Nvidia (NVDA), and Microchip Technology (MCHP), experienced gains exceeding 2% following the upward revision of second-quarter earnings forecast by server maker Super Micro Computer (SMCI). As a result, Super Micro Computer’s shares surged by more than 30%.

This positive momentum in the semiconductor sector propelled both the Philadelphia Semiconductor Index and the Standard & Poor’s 500 Information Technology Index to reach record levels.

Notably, Microsoft (NASDAQ: MSFT) and Apple (AAPL), recognized as the world’s most valuable companies, saw increases of 0.7% and 1.3%, respectively.

The rally in chipmaker shares has been buoyed by heightened demand for advanced chips used in artificial intelligence, as announced by Taiwan Semiconductor Manufacturing Co., the world’s largest chipmaker, on Wednesday.

While Wall Street witnessed a rise throughout December, recent weeks have seen a decline as investors tempered their expectations regarding the Federal Reserve’s potential interest rate cuts, originally anticipated to commence in March.

Europe

European stocks experienced a decline on Friday as investors tempered their expectations regarding major central banks reducing borrowing costs in the upcoming year. The focus shifted towards the upcoming meeting of the European Central Bank (ECB).

The European STOXX 600 index closed with a 0.3% decrease, having initially risen by 0.5% during the session. This week, the index suffered weekly losses of 1.6%, influenced by remarks from European Central policymakers hinting at potential tightening, causing traders to reassess their expectations concerning interest rate reductions.

Notably, the real estate sector, sensitive to interest rates, led the week’s losses, followed closely by the basic resources sector.

Within the session, the basic resources sector experienced a 1.4% decline. Additionally, shares of the services and industrial goods sector fell by 0.9%, driven by the drop in shares of the Swiss Engineering Group (ABB) after revelations that the group’s operations in China are under scrutiny by two American congressional committees.

The upcoming focus is on the ECB fiscal policy meeting scheduled for January 25, with widespread expectations that the bank will maintain existing interest rates.

Meanwhile, the British retail sector reported its most substantial decline in nearly three years in December, raising concerns about a potential recession. The British Financial Times 100 index closed unchanged amid these developments.

Oil

Global oil demand is projected to see a growth of 1.85 million barrels per day in 2025, reaching 106.21 million barrels per day, as per OPEC’s monthly report. This follows OPEC’s unchanged forecast in December for 2024, predicting demand growth of 2.25 million barrels per day.

In response to these projections, Brent crude futures contracts saw a 0.41% increase, reaching $78.22 per barrel, while US West Texas Intermediate crude futures contracts rose by 0.74%, reaching $73.10.

Conversely, the Red Sea faced disruptions due to Houthi attacks on ships, compelling numerous companies to reroute their goods around Africa, causing extended journey times and increased costs. In response to these attacks on shipping, the United States conducted another round of strikes against Houthi targets in Yemen on Wednesday.

Next week is poised for significant economic events both domestically and globally, attracting close attention from investors monitoring various economic indicators and reports.

In the United States, key releases include the advance estimate of Q4 GDP growth, personal consumption expenditures (PCE) price indices, personal income and spending data, and durable goods orders. Additionally, a roster of major companies is set to disclose their earnings reports, featuring Microsoft, Tesla, Visa, J&J, P&G, Netflix, Intel, T-Mobile, Verizon, Abbott, IBM, and Amex.

On the global stage, interest rate decisions are anticipated in the Eurozone, Japan, Canada, and Turkey. Manufacturing and services PMIs are also scheduled for release in Australia, Japan, France, the Eurozone, and the United Kingdom. These events collectively contribute to shaping the economic narrative and influencing market sentiments. Investors will closely analyze these indicators for insights into economic trends and potential market movements.