Equities had a bright start to the year as seasonal factors helped lift all major markets. UK and European markets were strong with the FTSE reaching a 3-year high as investors focus on undervalued stocks in both the FTSE100 and FTSE 250. With sterling and to a lesser extent the Euro undervalued, these stocks make interesting pickings for investors.
Review of last week’s key action
FTSE +247 +3.32% DOW +483 +1.46% S&P +56 +1.45% NASDQ +103 +0.98% DAX +686 +5.98% NIKKEI -120 -0.46% Hang Seng +1,210 +6.12%
In a holiday-shortened week, equities were typically in demand. US Non-Farm employment data painted a mixed picture with hourly wage growth coming in less than expected although new jobs were at 223K, which was stronger than expected. The headline unemployment rate came in at 3.5%, a record low, suggesting that US economic growth was not slowing.
Contrast this with the ISM services sector data which fell sharply to 49.6 against expectation of a 55 reading. This data could well be reversed in the January data as it is too far out of whack and inconsistent with other economic data.
Eurozone inflation data released earlier on last Friday helped pushed European equities up sharply as headline inflation fell more than expected to 9.2% versus 9.6% consensus. European equities had their best start to the year since 2009 as investors were clearly more optimistic than they were in the run-up to Christmas.
What continues to worry central bankers is the strength in underlying core inflation. This is where inflation becomes more difficult to tackle as workers demand and receive higher pay settlements and as a result service and manufacturing costs pressure further price rises – and these price raises feed further wage demands – resulting in spiralling inflation that central bankers will be keen to dampen down.
Of course, governments have their role to play. For example public sector pay demands of 10% or more in the UK will add to these spiralling inflationary pressures. Whilst inflation may have hit 11.1% in the UK in October, it is a wide held belief by economists and the Bank of England that inflation has peaked now and will settle down to average around 7.4% in 2023.
There is a little doubt that the UK and Germany are in a recession. Markets are hoping that the Federal Reserve will be able to constrain inflation without tipping the US economy into recession.
What is clear is that the Federal Reserve’s aggressive rate rises have convinced the markets the central bank will get ahead of the curve. The problem is core inflation and how stubborn this turns out to be. The Fed is less concerned about pushing the US economy into a mild recession than it is about failing to tame inflation. These competing forces will continue to be the main theme this year.
EURUSD -0.21 -0.2% GBPUSD unchanged USDJPY +1.01 +0.77%
Forex markets started the week with a minor US Dollar rally which ran out of steam last Friday following signs that the US employment picture might be softening. This seems a premature and overly optimistic view bearing in mind the headline employment rate hit a record low of 3.5%. Whilst many economists would regard the US Dollar as somewhat overvalued in the long term, falling Eurozone inflation isn’t going to help weaken the USD / EUR rate just yet. Seasonally the USD tends to perform quite well in the first quarter of the year.
Sterling’s weakness may turn out to be a short-term strength as international investors eye up undervalued UK equities. With Sunak in control at the helm, investors feel much more reassured following the Truss debacle.
Gold +43 +2.35% UK OIL -7.4 -8.6% US OIL -6.57 -8.17% Bitcoin +349 +2.1%
Gold bulls are feeding on any bullish data they can get hold of. Friday’s pullback in the US Dollar helped Gold jump $25, accounting for much of last week’s gains.
Contrast this with Oil which is suffering from the global slowdown in growth, the growing spread of Covid in China and the unseasonably warm weather across almost all of Europe which has resulted in much slower demand for both crude and natural gas for heating. Brent crude oil is now 22% lower than where it was when Russia attacked Ukraine on 24th February last year. Natural gas has suffered an even more spectacular drop with prices continuing to fall – now 70% lower than the peak in August last year.
Data / events for the week ahead
Not a very busy schedule of economic data releases but we do have US Inflation data which will be keenly anticipated.
Monday: Japan - Bank holiday – Equity markets closed for “Coming of Age Day”!
Tuesday: US - Fed Chairman, Jay Powell, speaking in panel discussion about Central bank independence and the mandate – evolving views. The chairman of the world’s most important bank normally gets people’s attention.
Wednesday: Australia - CPI. Inflation data. On the rise…… AUD sensitive
Thursday: US - CPI. Inflation data. Headline expected at 6.5% versus 7.1% last month. Core inflation expected at 5.7% versus 6% last month. Energy price falls are the main reason for the decline in both readings. The Fed don’t meet until January 31st by which time more economic data will have been unveiled. US and global Equities, Bonds and US Dollar all very sensitive.
Friday:
UK - Monthly GDP reading and Industrial & Manufacturing production . Output in the UK is expected to have fallen 0.3% in December as the recession takes hold. GBP and UK equities sensitive.
US - Prelim reading of University of Michigan Consumer Sentiment & Inflation expectations. Both key readings that are reliable leading indicators.
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