Investors on Monday were shrugging off the bad news of past week – especially the one that suggested that the Federal Reserve (Fed) would cut its rates only two times in 2025 due to a too resilient US economy. Yesterday’s data that showed that the US durable goods orders fell more than expected in November, the new home sales rebounded slightly less than expected and the consumer confidence unexpectedly dropped in December. This bag of bad news helped tempering the latest hawkish shift in Fed expectations. As such, the buyers are out and buying. The S&P500 rebounded 0.73%, Nasdaq 100 rallied more than 1% and even the European Stoxx 600 eked out a small gain, as Novo Nordisk in Denmark jumped more than 5.5% as investors rushed in to buy a dip on bet that the weight loss drugs are here to stay.

Other than that, the technology stocks kicked off the week in a great shape. Nvidia rallied nearly 3.70%, Apple advanced toward fresh highs, while the Magnificent 7 stocks – together – gained around 1.50%. The small caps however were left behind, with the Russell 2000 index sliding 0.22%. The concentration is back on the menu this year-end – perhaps as the higher yields drive capital toward the big cap companies that are less pressured by higher borrowing costs than their small and mid-cap peers.

Even though the equity markets looked joyful on Monday, the US 2-year papers remained offered and the US dollar erased earlier losses to finish the session higher against most majors. The EURUSD couldn’t hold on to gains above the 1.04 and slipped below this level on expectation that the morose European growth and political shenanigans demand a decent help from the European Central Bank (ECB) next year. In France, Macron placed French politics’ heavy weights in his newly formed government, but even the hefty names will hardly convince its divided government to agree on a budget deal that aims to narrow the French budget deficit. Across the Channel, Cable remained under pressure as softer-than-expected Q3 growth reinforced the ‘pain before gain’ narrative and boosted appetite for a more supportive Bank of England (BoE) policy while waiting for government spending to show up in the numbers. The EURGBP however remained offered near the 50-DMA and remains set for a further slide toward the 82 cents mark on the diverging ECB and BoE outlooks, where ECB expectations are sensibly softer than the BoE’s. In Japan, the USDJPY is back testing the 157 offers and could easily extend gains toward the 160 mark.

Meagre news and data flow should keep the focus on a more hawkish Fed. The pullbacks in the US dollar are probably good opportunities to buy the dips against most majors. As per equities, the rally extends but the questions regarding the ballooning valuations of Big Tech stocks become louder, too. Two stellar years of more than 20% gains for the S&P500 definitely calls for correction. But no one is willing to leave the festive table, just yet.

The GBP/JPY cross struggles for a firm intraday direction and oscillates in a narrow trading band, below the 197.00 round-figure mark through the first half of the European session on Tuesday. Moreover, the mixed fundamental backdrop warrants caution before positioning for the near-term trajectory amid mixed fundamental backdrop and thin trading volumes on Christmas Eve. 

The Japanese Yen (JPY) continues with its relative underperformance in the wake of the uncertainty over when the Bank of Japan (BoJ) will hike interest rates again. In fact, the Japanese central bank offered few clues on how soon it could push up borrowing costs at the end of the December policy meeting. Moreover, BoJ Governor Kazuo Ueda last week opened up the possibility of waiting longer for the next hike and said that the central bank will need a little bit more info on wage trends. This, along with a generally positive risk tone, continues to undermine the Japanese Yen (JPY) and acts as a tailwind for the GBP/JPY cross. 

Meanwhile, data released last Friday showed that Japan's core inflation accelerated in November and left the door open for a potential BoJ rate hike in January or March. Furthermore, speculations that Japanese authorities might intervene to prop up the domestic currency hold back traders from placing aggressive bearish bets around the JPY. Japan's Finance Minister Katsunobu Kato warned against excessive foreign exchange moves and reiterated earlier this Tuesday that the government is ready to act to stabilise the domestic currency. Apart from this, persistent geopolitical risks and trade war fears support the safe-haven JPY.

The British Pound (GBP), on the other hand, is undermined by the Bank of England's (BoE) split vote decision to leave interest rates unchanged last week and a dovish outlook It is worth mentioning that three members of the BoE's MPC voted to reduce rates. Moreover, policymakers downgraded their economic forecast for the fourth quarter of 2024. This might further contribute to capping the upside for the GBP/JPY cross. Hence, it will be prudent to wait for sustained strength and acceptance above the 197.00 mark before positioning for an extension of the monthly uptrend from the vicinity of the 188.00 round-figure mark.

Source: FXSTREET

EUR/JPY retraces its recent gains from the previous session, trading around 163.20 during the European hours on Tuesday. The EUR/JPY cross remains subdued following the release of the Bank of Japan's (BoJ) Meeting Minutes for October’s monetary policy.

BoJ board members highlighted the possibility of gradual rate hikes if inflation trends align with expectations, potentially reaching 1.0% by late fiscal 2025. The Meeting Minutes also underscored a cautious approach to monetary policy, focusing on wage-driven economic growth while addressing domestic and global uncertainties, along with fiscal measures to counter deflationary pressures.

Japan’s Finance Minister Katsunobu Kato stated on Friday that the government “will take appropriate action against excessive moves” in the foreign exchange market and will continue coordinating with international authorities on forex policies.

Last week, BoJ Governor Kazuo Ueda reiterated that the central bank would wait for further data to assess whether wage growth could maintain its upward momentum next year, aiming for greater clarity on economic trends.

The downside risks for the EUR/JPY cross is strengthened due to the subdued Euro amid rising bets of further rate reduction by the European Central Bank (ECB). Financial Times published an interview of European Central Bank (ECB) President Christine Lagarde on Monday, stating that the central bank is nearing its goal of sustainably bringing inflation down to the medium-term target of 2%. However, Lagarde stressed the importance of continued vigilance, particularly concerning inflation in the services sector.

On Saturday, ECB Governing Council member Boris Vujcic highlighted that the central bank plans to continue lowering borrowing costs in 2025, according to Bloomberg. “The direction is clear—it’s a continuation of the path from 2024, with further reductions in interest rates,” he said.

Source: FXSTREET

Formally, inflation figures and lower-than-forecast expectations helped the market to find ground for a rebound. However, the declines of the previous days may have broken the backbone of the bull market. A couple of technical signals indicate this.

Primarily, there is a series of 11 sessions of declines in the Dow Jones. This is one of the most sustained selloffs in the history of the index. The decline has not been particularly intense most of the time, except on 18 December when markets were pressured by a change in expectations from the Fed. This acceleration in the decline coincided with the index falling below its 50-day moving average, from which the index had been bouncing since August. On this indication, we can talk about the breaking of the medium-term uptrend, opening the way to the 200-day. It passes through 40800 and aims upwards to 41000 by the end of the year.

The S&P500 is fighting for the 50-day moving average, remaining below the 6000 level. In this case, the upward trend is not broken yet, as the market reaction to the relatively positive news on Friday brought the index back to its trend curve.

A similar technical picture is even stronger in the Nasdaq100, which was approaching the 50-day MA at its lowest point but bounced back impressively on Friday.

The outlook is most concerning for the Russell2000. This index of small stock market companies has erased all gains since the Republican election victory, losing over 10.5% from a peak in early December to a bottom last Friday. As in the Dow Jones, a break below the 50-day moving average accelerated the sell-off. This index is approaching its 200-day average (now at 2175). It has been trading above this curve since last December, making it an important support level: buying intensified as it approached it.

On a positive note, the Fear and Greed Index fell into the extreme fear area late last week. This is deep enough to provide a reset for the markets, but it is important to understand whether this is the start of a bear market.

So far, the stock markets have been unimpressive, and we cannot say whether the bull or bear camp is dominant. But by the end of the year, the picture will become clearer.

(Dec 24): Catastrophe-bond issuance rose to a record this year, increasing the overall market to almost US$50 billion (RM224.49 billion), as insurers transferred more risk from costly climate disasters to private investors.

Sales of bonds earmarked for supplemental coverage of large windstorms, earthquakes and other events totalled US$17.7 billion, up 7% from the previous record set a year ago, according to Artemis, which tracks the market for insurance-linked securities. The figures include cyber risk and private transactions.

“The cat-bond market had another year of strong growth,” said Tanja Wrosch, head of cat-bond portfolio management at Zurich-based Twelve Capital AG. “Larger, more diverse and deeper markets are key to the success and sustainability of cat-bond solutions and investment strategies.”

Cat bonds reward buyers for taking on insurance-market risk linked to natural calamities. If a predefined event occurs, bondholders can suffer hefty losses. If it doesn’t, they can earn double-digit returns.

Insurers and other issuers have become more eager to issue cat bonds, partly because of higher inflation, which has made it more expensive to rebuild properties destroyed in storms and other catastrophes. At the same time, insured losses have been rising as climate change stokes more extreme weather events. 

This month, Allstate Corp finalised the second-largest cat-bond deal in its history, obtaining US$650 million of reinsurance protection against storms, wildfires and other natural perils. The deal was about 86% larger than the initial target, according to Artemis.

Cat bonds continue to pay out more than many fixed-income assets. This year, investors are on track to earn returns of 16%, compared with a record 20% in 2023.

The yield on a catastrophe bond consists of a risk spread, plus the existing money-market fund rate. Investors have benefited from both attractive risk spreads and higher money-market yields of 4.5% to 5%, up from 0.25% or less during the pandemic.

There were sharp swings in the risk spread during 2024, partly because of sudden changes in the availability or scarcity of capital. It’s a market dynamic that’s growing in importance relative to underlying risk fundamentals, Wrosch said.

Twelve Capital expects the risk spread to be in the 5%-to-7% range next year. It was as high as 8.4% in 2024, according to data from Artemis.

Wrosch said cat-bond investors “can expect high single-digit to low double-digit gross returns” in 2025. Analysts at Plenum Investments AG, another Zurich-based cat-bond investor, are forecasting similar gains.

Cat bonds are designed to be shock absorbers for so-called tail events, which are rare but highly damaging weather-related disasters. Now, insurers increasingly want to use the securities to backstop rising losses from lesser but more-frequent hazards such as wildfires and thunderstorms. These events may have a modest impact individually, but they can cause large insured losses in aggregate.

While the scientific models underpinning so-called secondary perils have improved, they aren’t nearly as reliable as earthquake or hurricane models. That makes it harder to calculate risks. It remains to be seen whether cat-bond investors will be willing to bet on bonds that include aggregate losses, rather than bonds for single-occurrence events such as a Florida hurricane. 

“We still see investors showing a stronger preference for occurrence structures,” Wrosch said. “This is certainly true for us.”

Even so, the surge in aggregate losses is a dilemma the insurance industry needs to tackle. In a recent report, Twelve Capital pointed out that most insured losses from natural catastrophes won’t be from hurricanes this year but from wildfires, tornadoes, floods and other non-peak disasters — and they’ll exceed US$50 billion.

“Secondary perils remain very active with another year of heavy tornado and hail losses, in what may be a ‘new normal’ for this peril,” according to Twelve Capital.

Source: Theedgemarkets