Summary: The US equity market is back on-line today after trading into the pivotal 4,000 area for the S&P 500 Index, as traders wonder whether the recent rally can extend on hopes for a soft landing scenario or whether the bear market will return on downbeat news from the incoming earnings season. But the big event risk of the week is the Bank of Japan meeting up tomorrow, as markets brace for possible further policy tweaks from the Bank of Japan.
US equities are back on-line today after closing Friday into the key resistance/pivot area around 4,000 in the S&P 500 index (the cash index closed 1 point shy of 4,000 on Friday, the future has traded well above that level), which is also just above the 200-day moving average and near other technical levels. Through next week’s heavy calendar of megacap earnings reports, traders will watch whether the market can clear this key resistance area and make a bid to surpass the December pivot highs near 4,100 for the cash index. The Nasdaq 100 index has more work to do, still trading almost 600 points below its 200-day moving average and the December pivot highs above 12,100.
The Hang Seng Index pulled back 1.2% and the CSI300 Index retreated by 0.4% as of writing despite China’s Q4 GDP, industrial production, retail sales, and fixed asset investment coming in better than feared. Q4 GDP grew 2.9% Y/Y (consensus 1.9%; Q3: 3.9%). Separately, according to data from the Shanghai Securities News, more than half of the 31 provinces and municipalities that have released 2023 work reports, are setting their GDP growth targets above 5.5% for 2023. Economically important provinces of Zhejiang, Jiangsu, Guangdong, and Shandong set their targets at above 5%. The recent rallies are looking exhausted facing profit-taking pressure.
The FX market is bracing for the Bank of Japan meeting up in Asia’s Wednesday session (see preview below) with JPY crosses generally backing up, led by USDJPY pulling all the way above 129.00 at one point overnight after its Friday low just below 127.50. Worth remembering that a BoJ surprise that brings JPY volatility is more of a broad JPY story than a USDJPY story and aggravated volatility that triggers a generalized risk off could support both the yen and the US dollar. Action has generally been sluggish elsewhere, with AUDNZD rolling over a bit and the US dollar finding a some support as the US is back online today.
Crude oil trades steady near the top of its current range, after data showed China growing by more than expected in the fourth quarter. Overall, the market has seen a bid this month on China’s reopening optimism. Exports of deeply discounted Russian crude oil soared last week as it continues to circumvent sanctions Later today OPEC will publish its monthly oil market report with the IEA to follow on Wednesday. For now, further upside seems limited with China and parts of Asias about to go dark next week as the Lunar New Year holiday begins.
Natural gas prices in Europe slumped on Monday to levels not seen since 2021 as already elevated stock levels look set to get a boost from the resale of LNG previously destined for China. Just like Europe, China has seen mild winter weather and together with increased consumption of coal stockpiles of gas are elevated forcing buyers to send LNG cargoes to Europe instead. The Dutch TTF benchmark future (TTFMc1) closed at €55.5 on Monday, down more than 60% during the past month. EU gas stocks are currently 81.5% compared with a long term average around 62%.
A slight recovery in the dollar on Monday was all it took to trigger an overdue correction in copper which has surged higher during the past couple of weeks on raised expectations for a pickup in demand as China reopens. However, as we have warned recently, the recovery in demand is unlikely to be felt until well after the Lunar New Year holiday, and following a recent surge in speculative buying, the contract has increasingly been left exposed to profit taking, potentially taking it lower to test key support in the $4 area. Aluminium meanwhile hit its highest since June, up 9% on the month, and with visible inventories being at their lowest since 2002 Goldman Sachs warns about further strong gains in the months ahead.
Gold trades softer ahead of Wednesday’s BoJ meeting which may trigger an outsizes reaction in the dollar. Following weeks of mostly short covering speculators have now moved to mostly long accumulation, and it's during the early stages of this phase the market remains most vulnerable to a setback as recently established longs are less sticky than long held ones. Given the length gold has travelled in recent weeks a correction all the way back down to $1852 would not alter the overall bullish technical picture.
After trading near the cycle lows of late last year into 3.40% for the 10-year benchmark on benign inflation data last week and a series of very strong auctions for especially longer-dated US Treasuries, the 10-year yield rebounded toward 3.50% on Friday and traded slightly higher overnight after coming back from the long holiday weekend. The next US macro data point of note is perhaps tomorrow’s December Retail Sales release.
France is going into a nationwide strike on 19 January as trade unions are protesting the government’s plan to push back the minimum retirement age to 64 and to accelerate a previous reform, called the Touraine reform, which provides for the extension of the required contribution period to 43 years by 2035. Before Covid, the government also tried to implement a pension reform which caused a massive wave of demonstrations across the countries – there was basically almost no public transport in main cities for weeks. This is still uncertain how long the strike will last. But the trade unions are planning to keep fighting as long as needed. Expect a blockage in several sectors (refineries, metro, rail transport, education). At the moment, we don’t think the strike will have a noticeable negative impact on GDP growth this quarter. However, should the strike go beyond Thursday, this could reduce GDP growth by 0.1 or maximum 0.2 point in Q1, in our view.
The rally in cable has cooled off recently even as the decline in USD has continued. The pair is looking for direction and there may be some key catalysts to watch this week. Bank of England Governor Andrew Bailey spoke on Monday at the Treasury Select Committee hearing, saying that the risk premium on UK assets after the Truss government’s policy shock in September has gone. Still, confidence remains fragile, and risks also remain from China’s chaotic exit from Zero Covid, the continued fallout from the war in Ukraine and the shrinking of Britain’s labour force. Focus will now turn to economic data, with labour market data due today, CPI on Wednesday and retail sales on Friday. Any signs that labour market is cooling or that CPI has topped out could mean the BOE could start to consider a slower pace of rate hikes going forward, and that could see the 200DMA in GBPUSD at 1.2000 get threatened.
Official Chinese data released today showed an 850,000 drop in the Chinese population to 1.41 billion at the end of last year, the first official population drop since 1961. Births numbered 9.56 million in 2022, down just over a million from the prior year and at the lowest level since 1950, while deaths totalled 10.41 million.
The UK reported November Employment and earnings data today, with the Unemployment Rate steady for the month at 3.7%, while Employment Change rose 27k vs. 0k expected. Average Weekly Earnings rose more sharply than expected at 6.4% YoY ex Bonus vs. 6.3% expected and 6.1% in Oct. Alsot out this morning were December Jobless Claims data, which rose 19.7k vs. 16.1k in November (revised down from 30.5k, while the Payrolled Employees Monthly Change rose +28k vs. +60k expected and the November number was revised down to +70k from +107k.
The JPY has traded cautiously this week, ahead of the Bank of Japan meeting that has traders bracing for new policy tweaks after the Bank of Japan surprised in December with a widening of its trading “band” (de facto a “cap”) to 0.50% from 0.25%. The market has violated the band several times in recent days, requiring a heroic scale of intervention from the BoJ to enforce it. In question is whether the BoJ is willing to signal a further widening of the band and even an end to the last negative policy rate in the world of –0.10% before Governor Kuroda exits the scene in April after 10 years at the helm of the BoJ. Even if the BoJ fails to unveil new measures, the market may remain convinced that a further tightening shift is slowly under way and will arrive at latest with the arrival of a new BoJ Governor. The market is pricing a policy rate of more than +0.25% by the end of this year.
The Q4 earnings season continues this week, with a relatively light schedule before next week’s mother lode of mega-cap earnings reports. The key uncertainty is credit quality in 2023 as it is linked to the degree of a recession, or even whether there will be a recession at all in the US economy. Overall, the Q4 earnings season is likely going to see an extension of value and tangible companies performing better than intangible-driven companies. The two large US investment banks Morgan Stanley and Goldman Sachs are up today, not particularly good bellwethers for the US economy. On the other hand, Procter & Gamble, the consumer products giant, releases its earnings on Thursday and may offer interesting colour on the US consumer. The fast-growing French biotech lab equipment maker Sartorius Stedim reports today as well.
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