US stock market optimism diminished by Fed rhetoric hinting at keeping rates at 5%. S&P 500 didn't exceed 3900, Nasdaq finished a bit higher
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Good news is that Asian stocks entered bull market. Bad news is that the Federal Reserve (Fed) President Jerome Powell could hammer the post-NFP stock rally in US stocks. Sentiment is mixed and investors are tense before Powell's speech, and Thursday's US inflation data.
Asia enters bull market
Asian stocks entered the bull market, as China's post-covid reopening, the weakening US dollar, and stimulus from the Chinese government and central bank supported a sustained rally in Chinese, and the Asian stocks since last October.
As a result, the MSCI Asia Pacific index gained more than 20% since the October dip.
Plus, China announced that it will continue supporting growth with unheard amounts of stimulus packages. It is on the news that the Chinee officials are discussing a record 3.8 trillion yuan quota for local government bond issuance this year – it equals $561 billion US dollars.
Many investors expect the Asian equities to diverge positively from their Western peers through this year.
Tense before Powell
In the US, the good mood is more difficult to justify and to extend. The euphoria around Friday's jobs data faded on Monday, when Fed officials came up and said that... the Fed rates will go above the 5% level and stay there for some time.
Sounds familiar? Yes, it does, because the Fed officials have been saying that they will push the rates above 5% and keep them there for a long time to make sure that inflation is on a solid path toward the 2% target.
The S&P500 was unable to extend gains above the 3900, rapidly started erasing early-session gains and ended the session 0.08% lower. Nasdaq also gave back early-session gains, though closed the session 0.60% higher.
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US equity futures are in the negative this morning, as the King of market disappointment, the Fed Chair Jerome Powell, will be speaking at an event in Stockholm today, and he will probably not pop the champagne just because the wages grew less than expected last month, especially when you think that the US economy added a near record 4.5 million jobs last year, and that the unemployment rate fell to 3.5%.
Looking at the activity on Fed funds futures, the pricing suggests that the Fed will raise the rates by 50bp at the beginning of February. This means that there is a good margin for hawkish pricing in the coming weeks, into the Fed decision. Thursday's inflation read will be key in tilting the balance to one side, or to the other. A soft enough inflation figure could get investors to further go against the Fed.
In the FX
The US dollar index remains under a decent selling pressure, as a result of the dovish Fed expectations since last Friday's US jobs data. While any hawkish readjustment could give a minor boost to the dollar, the US dollar is set for further weakness this year. If the Fed shifts to a more dovish tone, the dollar should weaken, and if not, the dollar should still weaken on rising recession odds.
The EURUSD advanced to 1.0760 yesterday, which is the highest levels since last summer, while Cable flirted with 1.22 this morning. Gold consolidates gains above $1870, while we are about to see a golden cross formation on the daily chart, where the 50-DMA will shortly go past the 200-DMA.
Other supportive factors of gold prices these days are the softening US yields, and the cheapening US dollar. A softer inflation report on Thursday could get the bulls to target a rally above $1900.
In energy, crude oil remains under pressure despite the Chinese reopening talk, and the falling Russian supply. We see that the European sanctions weigh on Russian oil supply, as the 4-week average shipments decline despite a small gain posted last week. That means that the lower Russian supply will be another supportive factor of oil prices, besides the Chinese reopening, the tight global supply, the rising global demand defying recession odds, the fact that the Americans will have to refill their reserves, and the fact that oil companies underinvest to increase capacity. Despite the actual selling pressure, levels into $70 could be interesting dip buying opportunities for those looking for a sustainable recovery.
Likewise, commodities see a decent boost thanks to the Chinese recovery story. Copper futures – which are a barometer for global economy, are on a strong positive trend since the beginning of October, but they remain vulnerable to any deterioration in the global outlook. In this respect, the World Bank is expected to release its latest global economic prospect report this Thursday, and the projections may not be rosy.
