Stocks hit, dollar slips in illiquid year-end profit taking

By Alden Bentley, Naomi Rovnick and Ankur Banerjee

NEW YORK/LONDON/SINGAPORE (Reuters) - U.S. stocks wrapped up Christmas week on Friday with retracements of double-digit uptrends, and, alongside the dollar to a smaller degree, succumbed to profit taking in illiquid markets heading into the last weekend of 2024.

Even with its slight loss on Friday, the U.S. dollar was headed for an almost 7% annual gain, as traders anticipated robust U.S. growth, as well as tax cuts, tariffs and deregulation by the incoming administration of President-elect Donald Trump, would make the Federal Reserve cautious on rate-cutting well into 2025.

Selling in Wall Street's main indexes gathered steam through the morning, chilling the mood after the week started out showing the hallmarks of a classic year-end rally to crown what was already a stellar year.

“The Santa Claus rally came a bit earlier this year, and I think this is profit taking ahead of another holiday-shortened week next week," said Jeff Schulze, head Of economic and market strategy at Clearbridge Investments. "That’s another reason I think this isn’t causing more apprehension heading into a weekend. It’s not uncommon for the market to hit air pockets when the volumes are light."

Leading the decline were high-flying "Magnificent 7" stocks like Tesla <TSLA.O> which slid 4.9%, along with Amazon.com, Microsoft and Nvidia.

The S&P 500 fell 1.11%, leaving Wall Street's benchmark with a 0.67% weekly gain. The Nasdaq Composite ended down 1.49%, having been down more than 2% during the session. The Dow Jones Industrial Average fell 0.77%.

For 2024, the Dow is up 14%, the S&P 500 is up 25% and the tech-heavy Nasdaq is up 31%.

"I’ve heard anecdotes that pension funds are rebalancing ahead of year-end, selling stocks and buying bonds," said Steve Sosnick, chief market strategist at Interactive Brokers, who added he could not verify.

"It would explain the sudden sell-off on no news. And of course, if large funds are selling stocks en masse, the megacap tech stocks would bear the brunt because of their heavy weighting in major indices."

MSCI's broad global share index fell 0.59% on Friday, and was 1.45% higher for the week.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.1%, marking a 1.5% weekly rise, while Tokyo's Nikkei rose 1.8%.

Europe's Stoxx 600 rose 0.67% on Friday and was about 1% higher for the week.

"There is some potential upside left for this bull market, but it is limited," said Luca Paolini, chief strategist at Pictet Asset Management

"(Trump's) inauguration day is a potential inflection point and all the (prospective) good news will be in the price by then," Paolini added.

The dollar index, which measures the currency against six other major currencies, eased 0.06%, with a 0.2% weekly gain, and showed a 6.6% 2024 gain.

Dollar/yen was down 0.06%, but near Tuesday's 5-1/2 month high. The greenback was also showing a 5.4% gain this month against the beleaguered yen and a near 12% advance for 2024. The euro , was steady, not far from November's two-year low and showing a 5.6% loss year to date.

The BoJ held back from a rate hike this month, which weighed on the yen. Governor Kazuo Ueda said he preferred to wait for clarity on Trump's policies, underscoring rising angst among central banks worldwide of U.S. tariffs hitting global trade.

Fed Chair Jerome Powell said earlier this month that U.S. central bank officials "are going to be cautious about further cuts" after an as-expected quarter-point rate reduction.

The U.S. economy also faces the impact of Donald Trump, who has proposed deregulation, tax cuts, tariff hikes and tighter immigration policies that economists view as both pro-growth and inflationary.

Traders, meanwhile, anticipate the Bank of Japan will keep its monetary policy settings loose and the European Central Bank will deliver further rate cuts, neither positive for their currencies.

Traders are pricing in 37 basis points of U.S. rate cuts in 2025, with no reduction fully priced into money markets until May, by which time the ECB is expected to have lowered its deposit rate by a full percentage point to 2% as the euro zone economy slows.

Higher U.S. rate expectations pulled the 10-year Treasury yield, which rises as the price of the fixed income instrument falls, to its highest since early May early on Thursday, at 4.641%. It was last up 4.6 basis points at 4.625%.

The two-year Treasury yield, which tracks interest rate forecasts, eased 0.4 bp to 4.328%. U.S. debt trends also sent euro zone yields higher, with Germany's benchmark 10-year bund yield rising 7.6 bp to 2.401% on Friday.

Elsewhere in markets, gold prices dipped 0.74% to $2,615.54 per ounce, set for about a 27% rise for the year and the strongest yearly performance since 2011 as geopolitical and inflation concerns boosted the haven asset.

Oil prices firmed as investors awaited news of economic stimulus efforts in China, the world's biggest crude importer. Brent crude futures rose 0.67% on the day to $73.75 a barrel, and was 1.14% higher for the week.

In cryptocurrencies, bitcoin fell 1.26% to $94,485.00.

(Reporting by Ankur Banerjee in Singapore; Editing by Alexander Smith, Chizu Nomiyama and Chris Reese)