Asia open insights: The bullish beat marches on

Markets

Wall Street launched the final week of 2023 on a positive trajectory, extending the year-end rally that positioned the market on the verge of achieving a record high.

And holding true to its historical form, the" Santa Claus rally” marches on as more dry powder enters the picture.

A moderation in headline and core inflation has created a pathway for central banks to ease off on restrictive policies. As inflation subsides, the Federal Reserve sees higher real rates becoming increasingly economically unfavourable, possibly reducing the necessity for policy rates to remain in prohibitive territory.

Despite the resilience of U.S. growth, there are indications of deceleration and vulnerability in crucial sectors. While several Fed speakers have tried to temper enthusiasm for rate cuts before Christmas, markets still see the March meeting as a possibility for the first move lower. Some investors anticipate a later timeline, but positive inflation results support the notion of earlier rate cuts.

As 2023 concludes, many investors consider it a closed chapter, and for others who are still playing, there’s nary a persuasive sell signal in the tea leaves.

Even with Mega Tech concentration risk hiding in plain sight but with yields still on an arc lower, it's a challenge for the bears to drum up enough muster to take on the bulls. The endurance of positive sentiments regarding potential Federal Reserve rate cuts in the new year remains an open question that may find resolution with the early 2024 reading on U.S. Non-Farm Payrolls.

Undoubtedly, 2023 has proven to be a favourable year for stocks, challenging pessimistic recession predictions from some Wall Street skeptics. A surprising turn of events deviated from expectations, as the potential impact of AI emerged as a significant force countering the drag from aggressive monetary tightening.

In stark contrast to the preceding year, 2023 exhibited a remarkable transformation. The November/December "everything rally" played a pivotal role, marking a period in which various assets experienced commendable gains. This achievement is noteworthy, especially considering that cash emerged as one of the preferred asset classes.

Approaching 2024, a paramount question for market participants revolves around the fate of the $5-6 trillion currently residing in money market funds. The decision on how this substantial sum will be deployed or invested represents the multi-trillion-dollar question influencing the stock market dynamic to herald in a record-setting print to open the new year for the S&P500, that’s if we don’t hit it this week.

Oil market

Oil prices continued to rise due to a significant uptick in geopolitical risk after Iran vowed retribution following the killing of Senior Islamic Revolution Guard Corps (IRGC) commander Mousavi in an Israeli airstrike in Syria's Damascus. Warplanes struck three Kataib Hezbollah targets after U.S. bases in Kurdistan were targeted in retaliation and sending a clear signal to Tehran.

With tensions escalating in the Middle East, any plans to resume shipping in the Red Sea soon might be misplaced.

The conflict in Gaza has taken on a regional dimension. Daily attacks against U.S. targets in Iraq and Syria are occurring, as Iran and its allies perceive the U.S. as complicit with Israel. Incidents have also occurred between Israel and Hezbollah in Lebanon, and the Houthis in Yemen are involved. The Houthis, equipped with ballistic missiles, cruise missiles, and UAVs, strategically control the Bab el-Mandeb Strait, a vital global trade route. They have disrupted maritime traffic by seizing and attacking ships. However, skepticism exists about the conflict escalating into a full-scale regional war, likely limiting oil prices from pushing considerably higher.