Stocks were mixed on Monday amid a cautiously risk-on tone ahead of a very busy week for the markets that’s expected to get heated up mid-week by the Fed’s policy decision, culminating with the latest payrolls report on Friday. After a week of yet more upbeat economic indicators out of the United States, the soft landing narrative remained intact as the inflation data went in the opposite direction.
The slightly bigger-than-expected drop in core PCE on Friday underscored the view that price pressures in the US economy are cooling, paving the way for a rate cut sometime in the spring. But investors remain split as to the likelihood of the Fed chopping 25 basis points off the Fed funds rate as early as March, so the focus for the January meeting is entirely on what clues the FOMC statement and Powell’s commentary will offer on the timing.
So far, the data has been moving in policymakers’ direction, but the Fed has to tread carefully as the labour market is still churning out jobs at a solid pace. Chair Powell risks getting investors’ hopes up by not reining in expectations, only for them to be dashed if Friday’s jobs report surprises to the upside again.
Earnings and China risks for equities
Wall Street just enjoyed a third week of gains and although the major indices ended Friday mixed, the overriding mood is still positive amid the recent AI-driven optimism. Those bullish bets will be put to the test this week as the Big Tech earnings will continue in earnest, with Microsoft and Alphabet set to report their results tomorrow, followed by Apple and Amazon on Thursday.
Also helping sentiment today is the latest effort by Chinese authorities to bolster the local stock market. Chinese equities surged last week after the country’s central bank cut the reserve requirement ratio for lenders and pledged more targeted stimulus to come. But the rally started to fizzle out on Friday and regulators stepped in today to announce fresh restrictions on short selling after the recent informal measures failed to spur much of a rebound.
However, even today’s move may not go far enough as it’s been overshadowed by the news that troubled property giant Evergrande has been placed under liquidation by a Hong Kong court. Moreover, Washington is considering forcing cloud service providers like Microsoft, Alphabet and Amazon to disclose the names of foreign companies developing AI on their platforms, potentially escalating frictions with Beijing.
China’s CSI 300 index ended the session down 0.9%, bucking the trend in the rest of Asia, while most indices in Europe were in the red as US futures traded flat.
Euro struggles, pound flat as dollar holds firm
The US dollar, meanwhile, edged up slightly on Monday against a basket of currencies, but remained within the tight sideways range of the past two weeks. A breakout on either side of the range is likely imminent, with technicals supporting a move to the upside.
The euro continued to drift lower as investors are convinced that the ECB will begin cutting rates in April. Whilst President Christine Lagarde once again attempted to push back on early rate cut bets in her post-meeting press conference on Thursday, neither did she close the door completely to a policy shift before the summer. The euro is unlikely to find much support from this week’s flash GDP and CPI figures due out of the Eurozone.
A dovish tilt is also possible by the Bank of England this week as inflation in the UK has fallen sharply in recent months and looks set to fall further in 2024. Although it’s unlikely that Governor Bailey will be as forthcoming as Lagarde or Powell to talk about rate cuts, he may nevertheless tone down some of his hawkish rhetoric. Sterling was last trading flat around $1.27.
Heightened geopolitical risks lift oil and gold prices
In commodities, a flare up in tensions in the Middle East over the weekend sparked a jump in oil and gold prices on Monday.
Fears for a broader war in the region are rising after three US service members were killed and dozens injured from a drone attack on a US base in Jordan near the Syrian border, thought to have been carried out by Iran-backed militants. It comes after a Houthi missile attack targeted an oil tanker leaving the Red Sea on Friday.
Oil futures fell back after coming close to hitting a three-month high. Investors probably don’t see a significant threat to oil supply for the time being despite the ongoing attacks, but the fragile situation nonetheless is supporting demand for safe havens like gold, which was up 0.5% on Monday.
By XM.com
