Market sentiment weakened as December trading began, with equities slipping, the US dollar drifting lower, and Treasury yields easing across the curve. Investors now turn their attention to today’s Eurozone inflation release, which could help shape near-term expectations for ECB policy.
The first session of the week—and the month—delivered a hesitant performance across global markets. Risk appetite remained fragile, and the overall tone lacked conviction.
Much like several periods last month, the downturn in equities was not driven by a single clear catalyst. Some market participants pointed to hawkish remarks from BoJ Governor Ueda, which increased expectations for a potential December rate hike in Japan and raised concerns about an unwind of the JPY carry trade. While the reasoning holds some merit, it seems unlikely that this alone explains the broad pullback across global equities.
Instead, I think it was simply just a case of the rally having got a little exhausted in the short-term. Spoos, for instance, have just come off their best week since May, while having also notched five consecutive daily gains – prior to Monday’s session – for the first time since mid-September. A pause for breath after a move like that should neither be surprising, or cause for particular concern.
My overall view remains that the bull run is still firmly intact, and that dips continue to present attractive buying opportunities into year-end. The narrative behind that bull case remains an attractive one, with earnings growth solid, the underlying economy resilient, a calmer tone on trade continuing to prevail, and the monetary backdrop growing looser.
Further supporting the idea that what we saw yesterday in the equity complex was more of a blip, as opposed to things being derailed entirely, was that it didn’t exactly feel like a ‘proper’ risk-off day, especially looking at how other assets traded. Treasuries, for instance, softened across the curve, in keeping with broad-based weakness seen in Govvies across DM, while the dollar also rolled over, and gold trod water. None of that screams ‘haven demand’ or ‘massive panic’ among market participants.
Instead, what it does scream, is that there wasn’t an especially clear or coherent narrative to the conditions we saw yesterday. Instead, perhaps what was going on was simply a round of fresh positioning as the final stretch of the year got underway.
In any case, the sell-off across a substantially steeper Treasury curve was notable, and probably reflects more than a few renewed concerns over the Fed’s policy independence, especially amid growing chatter that Kevin Hassett is likely to get the nod as Trump’s pick to succeed Jay Powell as Chair.
Now, while Hassett will need to bring the rest of the Committee with him in whatever action he proposes, which as Gov Miran is finding out is no easy feat without a coherent economic argument, it does make sense for markets to discount a greater risk of inflation expectations un-anchoring, when the chances are that an easily-influenced uber-dove could be taking over at the helm of the Committee.
Those independence concerns were probably also what pressured the greenback through most of the day, though we did see some of that pressure fade as the NY day progressed, with the DXY bouncing rather nicely off a test of its 50-day moving average to the downside.
Considering that a coherent economic argument will be required to obtain a majority of votes on the FOMC, as mentioned a moment ago, I do think that a fair degree of what we saw yesterday in terms of USD selling is probably overdone, especially considering that 2026 – with both a ‘Fed put’ and a ‘Trump put’ – is likely to bring a return to the idea of ‘US exceptionalism’, and thus leads me to favour USD longs over anything else.
Lastly, a word on silver where, while the rally is getting rather squeezy in nature, and chatter about a renewed supply squeeze is increasing once more, we continue to print record high, after record high. This is still a move that I’d be inclined to go with, rather than fade, even if we are now into the realms of simply targeting psychological levels, with the bulls probably having $60/oz in their sights.
Eurozone data highlights proceedings, though I use that word very loosely indeed. November’s ‘flash’ CPI report is set to point to both headline and core inflation having held steady last month, at 2.1% YoY and 2.4% YoY respectively. Meanwhile, unemployment is also set to have remained unchanged, at 6.3%, in October. None of this data is likely to move the needle much for the ECB, whose easing cycle is done & dusted, and for which money markets discount just 6bp of easing over the next 12 months.
Elsewhere, Fed VC for Supervision Bowman will make remarks this afternoon, though entirely on that part of her remit, with no policy comments to be made, owing to the ongoing pre-meeting ‘blackout’ period. That’s just about your lot for today.
