Bracing for a slippery penultimate trading day of 2024

Asia open

As US stock markets concluded with a downturn on Friday, Asia-Pacific markets are bracing for a slippery penultimate trading day of 2024. With U.S. yields climbing and liquidity essentially non-existent, there's always the potential for outsized moves. This comes during a critical phase of year-end rebalancing, intensified by hefty equity positions across portfolios.

Equity allocations went from $40 billion in and around the cycle lows for US shares in October of 2022 to some $330 billion as of the second week of December.

As 2024 draws to a close, the focus shifts dramatically towards risk mitigation, overshadowing the usual risk-seeking behaviour ( aka Santa Rally), setting the stage for a cautious wrap-up.

The rise in 10-year US yields, which surged by 40 basis points in December, poses the obvious concern. Interestingly, most of this increase is attributed to the term premium, reflecting compensation for elevated inflation expectations rather than growth prospects. The most critical insight from December’s Federal Reserve meeting was not the rate cut but the upward revision in core inflation forecasts, prompting a serious reconsideration among policymakers and traders about the scope of monetary easing possible in 2025.

Add to this volatile mix the unpredictability of U.S. trade policy under the incoming administration, which remains a significant wild card. Although some may dismiss President Trump’s assertive rhetoric as simple posturing, the potential fallout could crack open a new can of worms, with repercussions possibly eclipsing those seen during his first presidency. As we edge closer to the new year, this brewing storm of uncertainty casts a long shadow across global financial markets, signalling a potentially tumultuous start to 2025.

There’s ample time to dissect all this market year-end chatter, and I usually steer clear of commenting on markets I'm not actively trading. I’ve opted out of placing significant bets this year-end, mainly because I dislike trading during the holiday season. It's even less appealing this year, with many of the usual market mavens taking extended breaks. I suspect we are seeing little more than time or volume-weighted rebalancing orders padding out the trading algorithms rather than genuine position-taking.

Despite the lull, the year's final days will not be actionless. The lineup of US economic updates could still stir the pot. We start with pending home sales on Monday, then dive into the housing market's pulse with updates from the FHFA and Case-Shiller on Tuesday. Wednesday might be slow as the trader shakes off the holiday hangover unless you prefer a dawn patrol run like me. Attention shifts on Thursday with fresh jobless claims data, and we hit the ground running on Friday with ISM manufacturing numbers. For those still manning their trading desks, these snippets could spark some end-of-year/ start-of-year fireworks in the trading arena.

Last week’s recap

In Friday's trading—a session thinned by low liquidity—the S&P 500 retreated 1.1%, and the Nasdaq 100 lost 1.4%, showcasing a broad market decline that hit tech megacaps hardest. This drop punctuated the extraordinary rally of the "Magnificent Seven," a group of tech titans responsible for over half of the US equity benchmark's stellar gains in 2024.

Amid year-end portfolio adjustments, the tech sector felt the chill of volatility as investors critically assessed their high-flying stocks. The Federal Reserve's recent pivot further soured the mood, signalling a sharp contraction in its rate cut forecast—from four to just two cuts next year—prompted by persistent inflation fears. This hawkish shift sent tremors through the financial markets, catapulting the 10-year Treasury yield to a formidable 4.63%, starkly contrasting September's more accommodating 3.6%.

The ripple effects of rising yields have cast shadows over the allure of growth stocks, particularly as the S&P 500's valuation stretches to a lofty 22.2 times forward earnings, far eclipsing the decade's average. Despite this, the index maintains a robust 25% year-to-date gain, mirroring its previous performance and continuing to outstrip the global equity composite by the widest margin since the 1997 dot-com euphoria.

As echoes of the late-‘90s tech boom resurface, whispers of a new tech epoch supported by a Fed-engineered soft landing grow louder. The skeptics might yet be blindsided in 2025 as the AI sector gears up for explosive growth. Innovations like xAI’s Grok 3 and Meta’s Llama 4 LLMs, which leverage monumental 100k GPU clusters, are poised to smash existing performance metrics and ignite an AI arms race. This is not just another chapter in tech—it’s a revolution poised to redefine the market landscape in 2025.