Equity markets had a choppy week last week following impressive gains the previous week. Data was mixed with better-than-expected employment data from the UK, US wholesale prices falling more than expected but weak US retail sales and mixed manufacturing data offsetting those positives.
Review of last week’s key action
FTSE -73 -0.94% DOW -927 -2.7% S&P -26 -0.66% NASDQ +61 +0.55% DAX -52 -0.35% NIKKEI +434 +1.66% Hang Seng +306 +1.41%
US equities had a mixed and choppy week, shortened because of the Martin Luther King holiday last Monday. Friday saw some strong gains in the US which help offset losses earlier on in the week.
Alphabet & Microsoft announced some big layoffs in their workforce as they both adapt to the post pandemic world. The stocks both reacted positively with Alphabet up 5.3% following the announcement. Another of those FAANGS, Netflix, also announced better than expected subscriber numbers which helped the stock rally 8.5%, which was a fitting sign-off for Reed Hastings, one of the founders of Netflix, who resigned as CEO.
Despite a number of positive developments last week the WEF in Davos was quite sobering for investors with central bankers reiterating their commitment to fighting inflation. Both Christine Lagarde from the ECB and Lael Brainard from the FOMC both reiterated their commitment to stay the course on their interest rate track. With labour markets still remaining quite tight it is likely that the Fed will push through more rate hikes albeit in 0.25% hikes over the next two meetings.
The risk for markets is a continuation of the cold snap in Europe and a possible/likely second offensive by Russia in Ukraine in the Spring. Any escalation that causes further disruption and/or increased demand for energy could see oil and, more importantly for Europe, gas prices head higher again.
Without doubt, markets are more optimistic than they were in December which is reflected in the moves so far in January. The IMF last week said that it would be upgrading global growth forecasts as lower energy costs and the opening-up of China are likely to lead to an increase in economic activity.
Investors, however, will want more feedback from central bankers – and in the US the next meeting is not until February 1st when most analysts expect the Fed to raise rates by just 0.25% taking the official rate to 4.5% - 4.75%.
Investors, analysts and economists are all trying to gauge the effects of the rates rises across all western economies which is difficult at the best of times. It has been many decades since any economy has experienced such a jump in inflation and the rapid rise in official interest rates to try and reign in the destructive forces of unchecked price rises.
Here in the UK, equities were focused on the impact of the persistent and higher inflation compared with other developed economies. Wage growth and core inflation are also a problem, not to mention the ongoing strikes.
Overall the bank of England is faced with an economy that seems stronger than most analysts’ forecasts, with growth in November beating the most forecasts. Despite the slight declines in inflation the Bank of England is likely to raise rates by a further 0.5% clip when it meets next month.
In the Far East, Chinese equities enjoyed another positive week as equities react to the end of the zero covid policy. Both the Hang Seng and the CSI have tacked on a whopping 50% and 20% respectively since the policy change.
EURUSD +0.23 +0.21% GBPUSD +1.69 +1.38% USDJPY +1.7 +1.33%
The US dollar continued its decline last week albeit at a slower pace. The Dollar Index, which is based on a basket of 6 currencies, declined to levels last seen in early June last year.
The main factor in the Dollar’s decline is forecasts for future interest rate moves but also the surprising risk-on moves seen in global markets so far this year. Investors have downgraded their forecasts of interest rate rises this year with some anticipating a slight easing in rates by year end.
Contrast this with Sterling, where economists predict a further hike of 0.5% in official rates at the next Bank of England policy meeting on February 2nd. Sterling as a result was one of the stronger currencies last week, hitting highs from Mid-December.
Gold +7 +0.36% UK OIL +2.26 +2.64% US OIL +1.78 +2.22% Bitcoin +2,765 +14.2%
Oil is reacting to the unlocking of China following the disastrous zero-Covid policy pursued by Beijing and to a lesser extent the colder weather in northern Europe and the US.
Gold tracks the US Dollar, recording modest gains in line with the falling Dollar Index.
Cryptos have experienced a decent recovery as the crypto bulls enjoy fewer negative headlines. Bitcoin jumped another 14% on retail interest.
Data / events for the week ahead
Some important data out this week ahead of the key interest rate decisions next week from the Federal Reserve and the Bank of England. Core PCE will be closely watched whilst manufacturing and service sector data from Europe and the US is scheduled for release.
China - Chinese New Year celebrations with markets closed all week in celebration. No impact on western markets though.
EU, UK & US - Manufacturing and service sector PMI data. A mixed picture with a modest pick-up in the EU and the US and a static picture in the UK. What is key to note is that all the major PMI measurements are below 50 which means contraction in these economies.
Germany - German IFO business climate. There are signs that the German economy is recovering from the energy induced swoon from H2 last year. Another pick-up in this large survey of manufacturers, builders, wholesalers, services, and retailers.
Canada - Bank of Canada policy meeting. Expected to raise rates by 0.25% ahead of the Fed’s meeting next week. CAD sensitive.
US - Advanced GDP reading for Q4. The first reading of GDP i the world’s largest economy. Q3 was adjusted higher to 3.2% whilst this reading is expecting a slip to 2.6% with a moderation in the price index. USD, US equity and bond markets sensitive although a lagged indicator it tells us little about future prospects.
US - Core Durable Goods orders. A good gauge of purchase order trends. The core rate excludes aircraft orders and cars which distort the data. USD sensitive.
US - PCE. Personal Consumption Expenditure. The Federal Reserve’s preferred measure of inflation. Key data that could influence next week’s interest rate decision. USD, US equities and bonds all very sensitive to this release.
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