In 2025, the traditional end-of-year rally seems to be struggling to materialize. Perhaps this is due to the fact that financial markets have been on an upward trend since last April. However, there is no shortage of supporting factors: favorable seasonality, ongoing rate cuts, increased money supply and rising corporate profits. Incidentally, this latter point debunks a widely held belief. Current valuations in the equity market do not justify a stockmarket crash. It is the decoupling of corporate earnings growth from rising stock prices that ultimately causes a trend reversal and a recession. We are not in this scenario at present, although the planned end of quantitative tightening, combined with a further cut in interest rates could trigger a new acceleration in the equity market, as was the case in 1998-2000, with the disastrous consequences that we are all familiar with.
In the meantime, the bond market continues to rebound, even as the Fed lowers the cost of borrowing. This contradiction could make the rate cuts appear to be a misjudgment of both the economic situation and the neutral rate level. In other words, while Jerome Powell considers the current rate level to be restrictive, the market seems to think the opposite.
On the currency front, the US dollar remains indecisive, with its index failing to break above 100.25. The EUR/USD will need to stay below 1.1655 if it is to maintain the momentum that has been building since September and, above all, break through 1.1500/1480 to truly confirm a reversal of the downtrend. The yen still seems to be on a slippery slope, even though the USD/JPY is still testing 154.50. A clear break above this technical threshold would pave the way for the year's highs at 158.88 and, at the extreme, 160.35. The Aussie now seems to be consolidating within a range of 0.6440 and 0.6580, which still needs to be confirmed, while the Kiwi is still in a downtrend below 0.5725/60. Finally, the USD/CAD remains well above 1.3935.
