US Stock Rally Stalls As Waller Remarks Boost Bonds: Markets Wrap

The yield on 10-year Treasuries fell by four basis points, settling at 4.61%. Recent developments indicate that stocks have faced challenges in maintaining momentum following a significant rally, while bond yields have decreased due to dovish comments made by Federal Reserve Governor Christopher Waller.

Wall Street also paid attention to the remarks from Treasury secretary nominee Scott Bessent, who warned that the US could encounter an economic crisis if the tax cuts introduced by Republicans in 2017 are not extended. Following an almost 2% increase in the S&P 500, equities took a slight downturn. Despite many companies performing well, a decline in technology giants hindered the overall market performance. Strong earnings reports from Bank of America Corp. and Morgan Stanley failed to lift market indices.

“Investors seem to be pausing after yesterday’s significant rally,” noted Jose Torres from Interactive Brokers.

Treasuries gained traction as Waller informed CNBC that there could be a possibility of lowering rates in the first half of 2025, depending on forthcoming inflation data. He even suggested that a rate cut in March could not be completely dismissed. Swap trading hints at potential easing later in the year.

The dollar remained close to its two-year highs, with Bessent underscoring the necessity of keeping the US dollar as the global reserve currency. Addressing the prospective inflationary effects of President-elect Donald Trump’s economic policies, Bessent expressed confidence that they could bring inflation closer to the Federal Reserve's target.

In market movements, the S&P 500 dropped by 0.2%, the Nasdaq 100 declined by 0.7%, and the Dow Jones Industrial Average also fell by 0.2%. A benchmark measuring the top seven tech stocks decreased by 1.9%, whereas the Russell 2000 rose by 0.2%. Meanwhile, the KBW Bank Index fell by 0.2%.

The impressive retail sales figures released indicated a resilient consumer despite the soft equity market performance. Traders highlighted a buy signal emerging from the latest sentiment survey conducted by the American Association of Individual Investors, despite bullish sentiment declining to 25.4%, below the historical average.

“Extreme sentiment indicators have shown to be reliable contrarian signals,” commented Larry Tentarelli from Blue Chip Daily Trend Report, explaining that investors typically exhibit maximum optimism during market peaks and heightened pessimism near market lows.

Looking ahead, Bank of America Corp. foresees potential surprises in the stock market for 2025 after the S&P 500 experienced substantial growth in 2023 and 2024. However, high valuations and risks related to fiscal and monetary policy may hinder such significant growth from happening again.

On the economic front, mixed data emerged, with diminished optimism among US homebuilders contrasted by promising retail sales figures. Analysts noted that the upcoming fourth-quarter earnings season could provide investors with insights into company performances.

Even a successful earnings season may not guarantee a continuous rally in equity markets, as concerns linger regarding economic growth and inflation. Analysts suggest that the earnings reporting period may be challenging, particularly in how markets respond to earnings that either exceed or fall short of expectations.

Additionally, investors have shown an increased interest in major technology stocks, as they prepare for the earnings cycle, signaling a recovery in this segment. Many hedge funds are also shifting back toward these stocks after months of selling pressure.

Corporate Highlights

• Morgan Stanley reported a substantial increase in fourth-quarter profits, significantly supported by strong trading revenues linked to US election volatility.

• Bank of America posted fourth-quarter profits exceeding expectations, driven by robust investment banking fees.

• PNC Financial Services Group Inc. and U.S. Bancorp gave cautious forecasts for net interest income, citing uncertainties about demand for loans amidst potential rate cuts.

• Microsoft Corp. announced a price increase for its consumer Office applications to cover new AI features.

• UnitedHealth Group Inc. reported ongoing high medical costs and missed revenue estimates for the fourth quarter.

• Target Corp. raised its sales outlook following a better-than-expected holiday sales period, though concerns over profitability remained.

• American Express Co. will allocate approximately $230 million to resolve an extended probe into misleading practices towards small businesses.

• Rio Tinto Group and Glencore Plc are reportedly in talks about a potential merger that could make waves in the mining sector.

• Reliance Industries Ltd. saw a marginally better-than-expected quarterly profit, powered by its telecom and retail divisions, despite fluctuations in its petrochemical sector.

• Taiwan Semiconductor Manufacturing Co. projected robust quarterly sales and capital expenditures beyond analysts' expectations, indicating strong ongoing demand in AI hardware.

Key Events This Week

• China GDP, property prices, retail sales, and industrial production are expected Friday.

• Eurozone CPI will also be reported on Friday.

• Additionally, US housing starts and industrial production figures are due Friday.

In summary, here are the significant market movements:

Stocks

• The S&P 500 dipped by 0.2% as of 4 PM New York time.

• The Nasdaq 100 lost 0.7%.

• The Dow Jones Industrial Average decreased by 0.2%.

• The MSCI World Index remained stable.

• The Bloomberg Magnificent 7 Total Return Index fell by 1.9%.

• The Russell 2000 Index saw a slight gain of 0.2%.

• The KBW Bank Index decreased by 0.2%.

Currencies

• The Bloomberg Dollar Spot Index rose by 0.1%.

• The euro displayed little movement at $1.0298.

• The British pound edged down by 0.1% to $1.2229.

• The Japanese yen gained 0.8% against the dollar, reaching 155.22.

Cryptocurrencies

• Bitcoin saw a 0.6% increase, valued at $100,262.36.

• Conversely, Ether fell by 3%, settling at $3,329.5.

Bonds

• The yield on 10-year Treasuries decreased four basis points, now at 4.61%.

• Germany’s yield on 10-year bonds declined one basis point to 2.55%.

• Britain’s yield for 10-year bonds fell by five basis points to 4.68%.

Commodities

• West Texas Intermediate crude oil dropped by 1.7%, trading at $78.66 per barrel.

• The price of spot gold rose by 0.7%, reaching $2,714.48 per ounce.

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