Optimism yesterday could’ve been boosted by slower-than-expected US retail sales in December, another set of strong bank and TSM earnings and hawkish comments from the Federal Reserve’s (Fed) Christopher Waller who said that he sees multiple rate cuts in 2025 and a rate cut sooner than market is pricing – if, of course, inflation continues to trend lower, which is his base case scenario. But a quick glance at the inflation metrics in the US confirms the worries that the US inflation is trending lower at a relatively slow speed. The energy and goods inflation is under control, but the core services inflation remains pretty sticky. And Donald Trump’s tariff threats and plans to jolt the energy space with further sanctions against oil-producing countries like Iran, Russia and Venezuela, threaten to maintain the upside pressure in oil prices this year. Although Trump explicitly wants to finish with the war in Ukraine, members of his new team say that they support further sanctions against Russian oil giants. On top, Trump will tighten his grip on Iran against its nuclear work and punish Venezuela for its anti-democratic turn… US crude eased yesterday as hitting the $80pb psychological mark encouraged many traders to realize profit, but crude is better bid this morning on good news from China, this time, and closing the week above the $80pb level could give investors another incentive to stick with their bullish bets – especially if China optimists join the party. Against odds, the Chinese economy improved in the final stretch of the year and managed to hit the 5% target in inflation-adjusted terms. But the country has been in deflation for the second straight year, and retail sales expanded just 3.5% versus a 5.8% advance in industrial production. Industrial production is easier to boost with stimulus measures than consumption, but consumption is the end goal for a healthy growth – and China is not there just yet. Anyhow, the CSI 300 index looks better today than it did for the past two weeks, the yuan is slightly higher against the dollar, but the Chinese 10-year yield remains under pressure.
Speaking of yields, the selling in US and European treasury markets slowed yesterday partly on the back of dovish comments from some central bank members, and partly due to a technical correction after days of dumping. The US 2-year yield slipped below the 50-DMA and the 10-year yield fell to around 4.60%. The British 10-year gilt yield retreated for the second day, letting the British government breath a sigh of relief – especially after yesterday’s GDP data showed that the UK economy hasn’t expanded – at all – under the new Labour government. The think tank of Labour circles accused the Bank of England (BoE) for the slow recovery saying that they’re putting the country’s prosperity ‘at risk for no good reason’ – they must have missed the inflation spiking past the 10% mark in summer 2023… Anyway, Cable managed to recover losses and return to the 1.22 level but the pair is under pressure again this morning. While in Europe, the EURUSD remains offered between the 1.03/1.0350 range as yields retreat from early-week peaks as well, also explained by a global correction across sovereign papers. But the narrative of exploding debt levels at both sides of the Atlantic Ocean, a possible U-turn in inflation trends and political worries remain the major drivers of sentiment, suggesting that the bond selloff may have further room to run and the yields are more likely to settle higher than the post-GFC levels – an expectation that could weigh on risk appetite.
That’s maybe why equity traders’ reaction to softening yields wasn’t unified yesterday. The European equities rallied on the back of softer yields and AI optimism following the TSM results. ASML jumped nearly 5%. But the European stocks were also boosted by a rebound in luxury stocks as the Swiss Richemont jumped nearly 17% to a record high yesterday on double-digit sales growth in Q4 – giving hope that the holiday season may have been prosperous for other luxury names like LVMH and Hermes, as well. LVMH jumped almost 10% to above its 200-DMA and Hermes closed nearly 5% higher, at a record high. But the German stocks saw less enthusiasm – although the DAX index was also pushed to a fresh record as well. In the UK, the FTSE 100 gained more than 1% as energy, mining, bank and real estate stocks advanced on the back of rising energy prices, and more dovish BoE expectations following a softer-than-expected set of inflation and growth data this week. As such, the US traders took over a cheery session but the cheerfulness quickly faded. Despite softer yields and appetizing TSM earnings, the builder of Nvidia and Apple chips remained short of breaking a fresh record in New York yesterday, Nvidia fell nearly 2% – as worries that the new chip curbs could weigh on its activity along with earlier news of delays in chip deliveries and order cuts. Together, the Magnificent 7 stocks retreated nearly 2%, while bank stocks advanced on another set of better-than-expected results from big banks. Morgan Stanley’s profit more than doubled, while Bank of America’s investment banking fees hit the highest in three years. All in all, the US big banks announced a blowout Q4 and deserved their overperformance on the rest of the S&P500 index.
What now? Good news is sparking a positive reaction from investors, with encouraging earnings keeping certain sectors in demand. However, the strongest gains are seen in areas benefiting from lower valuations, such as sovereign bonds and cyclical stocks, rather than high-valuation tech peers. The S&P500’s equal-weighted version recovered more than the normal-weighed index since the January 13 dip, and potential for a further convergence remains the base case scenario – especially if the global rate cut expectations get softer and yields come lower.
