Markets Wrap
Another eventful week of trading comes to a close, and we end the week quite differently to how we started it. Last week we saw solid upside in stocks with no real fundamental driver, as banks kicked off the Q4 earnings season and the US posted a relatively strong Michigan consumer sentiment figure. The theme of the improving global growth situation off the back of China’s reopening/demand and the improving outlook of the Eurozone were likely drivers which drove stocks higher and led oil to close at the week’s highs.
Into this week then and after a slight pullback on the US bank holiday on Monday we then rolled into the Chinese data on Tuesday morning, which was strong across the board with strong GDP, Industrial Production and Labour market figures which you would expect to prove supportive for risk as it shows that the world’s second largest economy is perking up, but that didn’t quite play out and if we know anything about markets it’s that if something cannot move higher off the back of good news, then you know where it is headed.
We move onto Wednesday where that reaction did play out. A couple of false breaks of 4000 which formed a conjunction point with the year long trendline in the S&P kept risk in check and showed a reluctance to keep the move heading higher.
In step the BOJ with unchanged policy settings after markets somewhat expected a further hawkish step, possibly to even ditch YCC after they upped the upper target range of the 10 year yield to 0.5% from 0.25% back in December, which did give markets a bit of positivity to begin with, but unfortunately we did not get the follow through with weak PPI and weak Retail Sales out of the US to follow.
This then brought back the fears of a global economic slowdown, couple that with hawkish FED speak from Bullard, who although a non-voter, did say he would be in favour of a 50bps hike in February, rather than the market consensus of 25bps.
Further downside in risk then followed on Thursday after comments from ECB’s Knot that the ECB was in fact planning to hike 50bps multiple times and that the ECB were not entirely happy with the markets ideas that a slowdown in tightening was on its way. Also, from a personal point of view, although he is a known hawk, the fact that the EZ is likely to avoid a recession now, this would suggest the ECB have more room to be hawkish and to get inflation under control. I would be inclined to agree with him.
Next Week
That brings us on to next week now and the major US data comes towards the end of the week with GDP and Durable Goods Orders to give us a further indication on the health of the economy as well as the Friday PCE figures, which is the FED’s preferred metric of inflation, to see if prices do continue to fall, and what needs to be done going forward. The Bank of Canada are out as well next week with a further 25bps hike expected and another update of how they are feeling about moving forward with Inflation continuing to decline in their economy.
All in all, a good week of trading with multiple opportunities to look at. Downside in Equities, upside in treasuries and Oil with the dollar flat. Into next week we’ll have to see how the news flow organises itself over the weekend but as of now, negativity remains in markets. Stocks, bonds and Oil seem to be the ones to keep an eye on. Interestingly, with stock downside we haven’t seen the Dollar gain much ground, so if stocks start pushing to the upside then maybe fresh Dollar shorts may be on. That is a very crowded trade though, so approach with caution.
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