Summary: While Japan, the UK and the US have yet to start trading this year, markets are on the move elsewhere, as mainland European stocks put in a strong session yesterday and the Hang Seng in Hong Kong is making a bid at multi-month highs overnight. Despite Japan’s closed markets, the JPY is surging, as are the Chinese renminbi and gold, which rose overnight to a six-month high in USD terms.
S&P 500 futures opened 0.7% higher on the first print of the year but have since retreated lower up 0.3% for the session compared to the last day of trading in 2022. The positive sentiment from yesterday’s European equity session and positive trading session in Asia, despite a slightly weaker than estimated China PMI manufacturing figures for December, are carrying over into US equity futures. We still expect equity markets to be quiet and not reveal anything meaningful in terms of information of positioning and flows until early next week.
On its first day of trading in 2023, Hang Seng Index opened lower but rallied to post a 2% gain as of writing. China telcos, electricity generating companies, pharmaceuticals, autos, and Macao casino operators led the charge higher. It is widely expected that the border between the mainland and Hong Kong will be reopened as soon as January 8, 2023. Investors brushed the weak December NBS PMI reports released during the holiday and the Caixin PMI today and the inevitable surge and spread of Covid inflections during the initial stage of relaxation of pandemic containment in China to focus on the improved economic outlook in mainland China and Hong Kong for 2023. China’s CSI 300 Index gained 0.5%.
… with the Japanese yen surging to new highs overnight versus the rest of G10 currencies as the 130.00 level in USDJPY gave way without much fight and EURJPY is poking below 138.50, its lowest level since September of last year as the market has grown increasingly convinced that the Bank of Japan is set for a further policy tightening this year and despite the ECB’s overt hawkishness. The Chinese renminbi is also off to a strong start in 2023 despite dramatic disruptions to activity on the ground from Covid as a further CNH rally overnight has taken USDCNH to within striking distance of its 200-day moving average near 6.86. The USDJPY performance is particularly interesting, given the tight correlation of USDJPY with US treasury yields over the last 12 months and more, as US yields backed up sharply to end 2022 and have yet to trade this year.
Crude oil futures fluctuated around unchanged as a new year got underway overnight in Asia. Another volatile year undoubtedly lies ahead with multiple uncertainties still impacting supply and demand. The two biggest that potentially will weigh against each other in the short term remain the prospect for a bumpy recovery in Chinese demand being offset by worries about a global economic slowdown. Covid fears, inflation fighting central banks, lack of investments into the discovery of future supply, labour shortages and sanctions against Russia will also play its part in the coming months. Sentiment, however, did improve ahead of yearend after hedge funds raised bullish Brent crude oil bets by the most in 17 months.
Gold trades at a fresh six-month high above $1840 and silver an eight-month high at $24.50 as the positive momentum from December gets carried over into the new year. The US treasury market opens later today but futures are signalling softer yields from where we left off on Friday while the dollar trades soft led by a strong yen. In general, we are looking for a price friendly 2023 supported by recession and stock market valuation risks, an eventual peak in central bank rates combined with the prospect of a weaker dollar and inflation not returning to the expected sub-3% level by yearend all adding support. In addition, the de-dollarization seen by several central banks last year, when a record amount of gold was bought look set to continue, thereby providing a soft floor under the market. In the week ahead we focus on Wednesday’s FOMC minutes and Friday’s US job report. Above $1842, the 50% of the 2022 correction, gold will be looking for resistance at $1850 and $1878 next.
HG copper trades up more than one percent at the start of a new trading year, but still within a tightening range, currently between $3.8 and $3.94 per pound. We expect to see a bumpy start to the year with China’s reopening process potentially being delayed by virus outbreaks and companies shutting down early ahead of the Lunar New Year, starting already on January 23 this year. In addition, the risk of a global economic slowdown as highlighted by the IMF in its latest update may also weigh at the start of a year. Overall, however, the medium term offers further upside driven by reduced mining supply and increased focus on the electrification of the world, a copper intensive process that may offset weakness from the housing sector.
US Treasuries have just started trading for 2023 this morning in Europe, opening some five basis points lower for the 10-year benchmark at 3.82% after backing up sharply as 2022 drew to a close, particularly at the longer end of the yield curve, helping to steepen the 2-10 portion of the treasury yield curve from its most inverted levels in some four decades earlier in December at around –80 basis points, to closer to –50 basis points as market participants figure that a recession is on the way this year that will see the Fed chopping rates by year end. The 10-year yield level to watch to the upside is perhaps the 4.00% area ahead of the 4.34% high from October, which is a 15-year high.
… warning of a further rise in borrowing costs to fight inflation - “It would be even worse if we allowed inflation to become entrenched.” Bundesbank president Joachim Nagel was also out yesterday warning of a “significant increase in long-term inflation expectations”. European yields surged in the wake of the December 15 ECB meeting on Lagarde’s hawkish blast at the press conference, with German 2-year yields, for example, rising from 2.13% before that meeting to as high as 2.77% last Friday before easing a few basis points yesterday.
The company delivered 405.3k vehicles in the fourth quarter, which fell short of consensus expectations for over 420k. Still, the number was a record for quarterly deliveries and strongly higher from the 308.7k vehicles Tesla sold in Q4 of last year. Tesla shares lost 65% last year, though they did surge over 10% off late December lows just ahead of year-end.
An FT poll of over 100 economists suggested that four out of five respondents think that UK growth will fall short of global peers, with GDP already falling and continuing to do so for this calendar year, after the inflationary shocks of the last two years will required that the Bank of England continues to raise borrowing costs and as the new Sunak-Hunt government is bent on stabilizing the country’s debt trajectory with a more austere fiscal regime than its predecessors.
The new year has kicked off with a warning from the IMF head that a third of the global economy will be hit by recession this year. In their latest update Kristalina Georgieva warned that the world faces a “tougher” year in 2023 than the previous 12 months as the US, EU and China are all slowing simultaneously. China could see its annual growth in line with global growth for the first time in 40 years and potentially acting as a drag on instead of a driver of worldwide growth. She did sound more optimistic on the prospects for the US saying it may avoid recession because unemployment is so low.
The market continues to express the view that inflationary pressures will decelerate and that the labour market will loosen up sufficiently for the Fed to begin chopping rates before year-end. Last week’s US Consumer Confidence survey for December showed a strong surge in confidence, a development that is at odds with past patterns for the survey if the country is tilting into a recession. Further strong US data for December and the next month or two would be an interesting challenge of the market expectations. This week sees the release of the December ISM manufacturing survey and the December jobs report, both on Friday.
The perennial debt ceiling issue was largely skirted over the last couple of years as pandemic priorities may have prevented partisan grandstanding. But Republican lawmakers have promised a fight to extract concessions from the Biden administration. Watching for how hard the Republicans are willing to take this issue as the debt ceiling will be reached by summer of this year.
The earnings calendar is light in the first week of the new year, but in a couple of weeks the first Q4 earnings releases will begin to be released. The Q4 earnings season will continue its focus on margin pressures related to input costs on employees and raw materials including energy.
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy