Chinese Lunar New Year celebrations this week with Chinese markets closed and Hong Kong shut until Wednesday.
So, what do we know?
(A forex, index, and commodity market review)
Another week of records. Whilst the relentless US equity markets hit new highs the Japanese Nikkei surged another 2% last week, touching the highest level since December 1989 – a 34-year high.
Weekly change (amount change and percentage change on the week)
FTSE -40 -0.62%
DAX +14 +0.08%
DOW Unchanged
S&P +69 +1.39%
NASDQ +347 +1.97%
NIKKEI +708 +1.94%
Hang Seng +364 +2.37%
US equities reached record highs last week with the S&P500 breaking through the psychological 5,000 level, although market breadth was lacking as the gains were down to further significant gains in just a few of the Super 7 tech stocks. Whilst the S&P500 has gained 5% so far this year, most equities have not seen such gains as the Federal Reserve disappointed the wildly optimistic view about the scale of rate cuts the federal Reserve would deliver.
What has propelled the market higher, and more than offset most stocks that have struggled, has been in a surge of over 30% in a number of the Super 7 tech stocks. Nvidia, the chipmaker benefiting form the A1 boom, and Meta, the owner of Facebook, have rallied over 30%. In just one year, Meta has rallied 163%.
Only half of the S&P500 constituents have risen this year which is a concern. The Russell 2000 which contains smaller US companies, is a long way of its highs achieved in 2021 which is down to concerns over profit margins due to the higher interest rates and increasing belief that rates wont fall as predicted at the start of the year. Conversely the Sup 7 tech stocks have huge cash piles that effectively insulates them from the interest rate debate.
The weakening of Japanese Yen last week helped propel the Nikkei to a 34-year high. The author recalls the heady days in the Japanese equity markets in the 1980’s but did not expect it to take 34 years to recover the ensuing losses as Japan suffered lost decades of growth. The Japanese equity markets have an increasing band of followers, not least Warren Buffet, bolstering further gains.
EURUSD Unchanged
GBPUSD Unchanged
USDJPY +0.93 +0.62%
The US Dollar was always destined to rebound following realisation that the markets had got far too dovish on interest rate expectations this year. Interest rate expectations is what drives a lot of moves in foreign exchange. The final nail in the coffin for interest rate doves was the astonishing jobs report on Friday 2nd February. The number was so strong, with an additional aggregate number of new jobs of reported in January of 470,000 (including the revision to December’s jobs of 117,000) – far exceeding forecasts of 187,000 new jobs. As a result, any lingering expectation of a rate cut in March is off the table now with the CME Fed Watch tool forecasting an 83% probability of rates staying on hold at 5.25 – 5.5%. Contrast this with a 80% probability of a cut of 0.25% one month ago.
The Euro started the year above 1.10 versus the US Dollar. Of course, interest rate expectations in the eurozone also have a direct bearing on the UER / USD rate. With Germany and Italy continuing to struggle and the broader Eurozone economy stagnating, the calls for cuts in the ECB’s official rates grows louder.
Gold -14 -0.69%
UK OIL +4.29 +5.55%
US OIL +4.12 +5.70%
The US Dollar and global-macro events continue to be the main driver for Gold. Despite the threat of further escalation of the war between Israel and Hamas spreading, the US continues to do all it can not prevent such an escalation. Oil markets reflected the greater concern as crude oil recovered all its losses from the previous week.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
Inflation data is the focus this week in both the US and UK. We also have GDP data from the UK which may confirm that the UK is in a technical recession.
Monday
China Lunar New Year Celebrations. Chinese markets closed for the whole week. Hong Kong markets also closed but re-open on Wednesday.
UK BoE Governor, Andrew Bailey, speaking at event at Loughborough University. Will be interesting to hear his comments ahead of Q4 GDP data to be released this week.
Tuesday
UK UK Employment data. Claimant count and average hourly earnings for January. GBP sensitive.
US CPI Inflation data. Headline expected at 2.9% y/y and 0.2% monthly. The core rate, which excludes the volatile energy and food components, is expected to rise 0.3%, the third rise in a row. USD and US assets sensitive to this release.
Wednesday
UK CPI Inflation data. Headline expected at 4.1% due to base effect of last January’s fall of -0.6%. Expectations are for further downward pressure by April as last years rapid increases in inflation fall away. GBP sensitive.
UK BoE Governor, Andrew Bailey due to testify before the Economic Affairs Committee, in Parliament. Can be lively. GBP on watch.
Thursday
UK GDP data. Q4 GDP data. Expected at -0.1% which if confirmed would signal a technical recession in the UK, following Q3 reading of -0.1%. Regardless of a recession or not, the UK remains stagnant which will ramp up pressure on Rishi Sunak in a week of two by-elections.
Eurozone Christine Lagarde testifying before the Committee on Economic and Monetary Affairs, in Brussels. EUR sensitive.
US Core retail sales. Expected at +0.1%
US Empire State Manufacturing Index. Despite the huge jump in new jobs in January, the manufacturing sector continues to struggle.
Friday
UK Retail Sales. A rebound of 1.5% following January’s release for December which was horrendous for retailers. GBP sensitive.
US Core PPI. Remaining subdued.
US Prelim University of Michigan Consumer Sentiment. Happier consumer with falling inflation expectations. USD sensitive
