Upbeat investors are knocking on February’s door after end of month rebound
After a wild and turbulent week, which saw European markets close lower for the third week in succession, and US markets hit seven-month lows, before closing the week higher, January has been a month which has proved to be hugely challenging to define a narrative for more than a day.
While markets in Europe ended last week on a downward note, US markets managed to set aside concerns over a much more hawkish Federal Reserve, with the Dow posting its best one day gain this year, pointed out Michael Hewson, chief market analyst at CMC Markets UK, this morning.
“Friday’s rebound in US markets partly stemmed from a record-breaking quarter for Apple, which helped underpin sentiment around a tech sector that has come under increasing scrutiny about the sustainability of some valuations,” Hewson said.
“The late rebound also saw US markets finish the week higher, in a move that is likely to aid in getting European markets off to a positive start this morning, as we come to the end of what has been a turbulent month,” he added.
Last week’s Fed meeting only added to the overall uncertainty for investors by giving the impression that they could well raise rates at every meeting, and even consider a 50bps hike if the need arose, Hewson stressed.
“This was a point that was emphasised further at the weekend by Atlanta Fed President Raphael Bostic, and while it adds to the noise about a 50bps rate hike in March, it doesn’t mean that it is any way likely.”
“This is because Bostic has always tended to lean towards the more hawkish side on monetary policy. He was one of the first members to break ranks to urge faster tapering. There is also the fact he doesn’t have a vote this year,” he added.
“If markets were looking for reassurance from the Federal Reserve last week about the pace of policy tightening, they didn’t get it.”Analyst Michael Hewson
What has been more notable for Hewson is that the “more dovish voices” on the FOMC have become much less so, with Minneapolis Fed President Neel Kashkari also saying rate rises were needed, which means that a March move seems pretty much nailed on, as markets price in the prospect of up to 5 rate rises this year.
“If markets were looking for reassurance from the Federal Reserve last week about the pace of policy tightening, they didn’t get it, with Powell insisting that all Fed policy options were open for March and beyond,” Hewson explained.
“While this seems entirely sensible; it wasn’t the message increasingly nervous markets wanted to hear. In essence it was the Fed saying to markets that the days of handholding are over; and that their priority now is inflation, and not the jobs market, as we look towards Friday’s jobs report, where the focus has been less on the headline jobs number in recent months, and more on the wages numbers.”
February is knocking
This week market attention shifts to the likes of the Bank of England, as well as the European Central Bank on Thursday, for their rate decisions, though we also have the Reserve Bank of Australia tomorrow, although no change is expected there.
Today’s Germany CPI numbers are likely to give the ECB cover later this week to maintain their loose policy narrative for the remainder of this year, when it slips back from 5.3 per cent to 4.4 per cent in January, “largely due to the reintroduction of regular VAT rates and additional climate measures which boosted German CPI by over 2% a year ago, thus introducing a higher base line for today’s figure,” Hewson said.
“Over the last two weeks, the People’s Bank of China has been going in the opposite direction on monetary policy, easing several key loan rates in order to reinvigorate an economy that is struggling with higher inflation, disrupted supply chains, and a government determined to pursue its zero-Covid policy,” he concluded.