The new week kicked off with Chinese equities jumping into a bull market as traders returned from their Lunar New Year holiday.
The CSI index, which began its positive move back in November, rallied more than 20% since then, and the positive vibes weren’t only on the menu of the Chinese, the S&P500 also freed itself from the 2022 bearish trend and extended rally in the bullish consolidation zone for the second straight day on Friday; there was nothing better to end a week – where the GDP data surprised to the upside – with a spot-on easing in core inflation. The cherry on top was the faster-than-expected contraction in US personal spending in December, while Michigan’s inflation expectations for 5-years remained steady at 2.9%, while analysts were expecting a read around 3%.
Bonds are having the best time
The picture in the bonds market is not less colorful. Global bond markets also had their best January since 1990, and if the equity rally is still on a shaky ground – due to fear that the slowing economy could hit company earnings – the future in bonds looks brighter. It is said that the US pensions are presently sitting on their biggest surplus in about two decades, and in dollar terms that means they have something like $1 trillion to spend to… buy bonds! Such buying will counter the falling demand from the Fed, which shrank its balance sheet by around $500 billion so far. So, the scenario of catastrophe that we were painting for 2023 may be a bit rosier after all.
But it’s too early to tell.
Huge week ahead
In the macro front, the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) will be announcing their latest policy verdicts, between Wednesday and Thursday.
For the Fed, there is extremely little doubt that this week’s rate hike won’t be anything more than a meagre 25bp hike.
Inflation is headed lower, economy is slowing if you look at the PMI figures, but the slowdown is not dramatic if you look at the GDP numbers. The US jobs market is still tight, however, but as long as inflation is headed lower, the Fed should not be too obsessed with people losing their jobs.
The US 2-year yield is stable since the start of the year between 4 and 4.30%, and the dollar index lost up to more than 3.80% since the January peak.
The depreciation in the US dollar clearly let the world’s other currencies breathe – and note that, that also probably helped convincing investors to return to the markets, as the US dollar seemed no longer on a one-way rally.
The only risk for FX traders this week is Jerome Powell, because he will certainly not declare victory on inflation and remind investors that the rate hikes will continue, though the size of the coming hikes will certainly be small. If that’s the case, we could see a minor rebound in the US dollar across the board, yet the dollar outlook remains bearish for this quarter.
Elsewhere. The ECB is expected to hike by 50bp this month, and Madame Lagarde will certainly remind investors that there will be as much 50bp hikes as ‘little breads’ for the Europeans on the pipeline – as goes a French saying.
Across the Channel, we know that the BoE will hike the interest rates, we don’t know by how much. In one hand, the BoE should continue fighting against inflation – which remains in the double-digit zone in Britain. On the other hand, the economic outlook for Britain is so morose – with country-wide strikes adding salt and pepper to the gloomy picture that Bailey cannot throw a series of 50bp hikes in the middle like Madame Lagarde.
After a nice 5% rally against the US dollar in January, Cable consolidates gains a touch below the 1.24 mark. The risks look tilted to the downside this week with the high possibility of a hawkish Jerome Powell, and the low – but still existent probability of a dovish BoE action. All Cable must do to remain in the bullish trend is to hold support at 1.2225 level, which is the major 38.2% Fibonacci retracement on January rally.
Against the euro, the pound will likely see limited appetite into the 50 and 100-DMAs, as both the economic and the central bank outlook for Europe and UK do support a better valuation for the euro than the contrary.
The Indian markets are being shaken by the Adani scandal – which will certainly be a great Netflix series next year. The Nifty 50 extended losses to fresh lows since October despite Adani publishing a more-than-400 pages denial of the short seller’s allegation.
In energy, OPEC will meet this week, but the cartel is expected to maintain the production levels unchanged at the current levels.
In earnings, Amazon, Apple, Google, Meta, Exxon, Starbucks and Ford are among big names that are due to announce earnings this week.