Europe Tries to Ride on US Coat-tails

“When the market is hinging on the words of Fed officials, I really think that’s a mistake in direction,” - Chicago Federal Reserve President Austan Goolsbee. Ok chief, whatever, you leave that to us.

Ron DeSantis has quit the presidential race and backed Trump, leaving only Nikki Haley to challenge a Trump procession.

Big Picture

US stocks record high, Japan highest in 34 years, China back to 2008 type lows...why the exit from China? Lots of things I guess – we can talk about the property market bubble pricking, the growth outlook being kinda muddy, stimulus being notable by its absence and demographics...but ultimately, I’d say this is a geopolitical story. Or as BofA puts it: the ABC "anywhere but China" trade. Why the record high in the US? Tech is back after a wobble and dragging the rest of the market up. AI is the key here as investors price in higher multiples despite the slowdown we are seeing in the economic data. And consumers are feeling better – maybe that’s because inflation has come down a lot. Consumer sentiment soared 13% in January to reach its highest level since July 2021, the University of Michigan reported on Friday, whilst year-ahead inflation expectations softened to 2.9% after plunging in December, the lowest reading since December 2020. At the same time markets are cooling somewhat on expectations for aggressive rate cuts this year – but is this Goldilocks territory…ie a few cuts, very soft landing, immaculate disinflation? Seems too good to be true. Tech might get a bit of a shake out as the meat of the earnings season approaches.

Indices and Japan

Some Figures - The S&P 500 rallied 1.23% on Friday to 4,839.81, breaking the previous record close from Jan ‘22, leaving it up around 1.5% for the YTD. The Nasdaq 100 rallied 1.95% also to a record high. The FTSE 100 fell over 2%, its worst week since October. Europe ex-UK declined 1.5%. Hong Kong now down 12% YTD, Shanghai –7%, Shenzhen –10%. This morning, European equity indices are rallying on the US tailwinds. The FTSE 100 added about a third of one percent to touch 7,500 again, having slipped to its weakest since November last week. The DAX added around 0.6% to 16,700, whilst the CAC rose 0.8% to 7,453. BoJ tonight, then PMIs on Wednesday, ECB on Thursday and US PCE inflation on Friday.

Of course, the Nikkei at 36k relies on the Bank of Japan staying loose – we have seen the rally morphing from a kind of reflation play to something like a ‘weak yen is good for exporters’ kind of deal. So all eyes on the BoJ tonight/tomorrow morning. It’s expected to be unchanged on its main policy rate and yield envelope but could give some greater clarity about sequencing and timelines. Japan's wholesale inflation was flat in December, slowing for the 12th consecutive month, easing pressure on the BoJ to act. But pay negotiations are key and ex BoJ official Maeda says a wage-price-spiral is already underway. He says a 4% gain in wages will pave the way for the central bank to raise rates and normalise policy. Another ex-official Sakurai has said the BoJ is ready to end negative rates by April.

Earnings Kicking Off

United Airlines reports today - what impact from Boeing after it grounded 79 Max 9s? A chunk of Dow components report on Tuesday: 3M, Johnson & Johnson, Verizon, Procter & Gamble and Visa. Netflix is also due to report its earnings after a strong recovery saw it deliver better-than-forecast profits in the prior quarter and 9m new subscribers – the strongest rise since 2020 when Covid hit – as its password crackdown bore fruit. Key question is whether it can maintain the momentum from this play, which has seen the stock rally something like 166% off its lows in 2022. Loop Capital: “The rationalization of the streaming industry is starting and NFLX’s dominance is becoming even clearer. As the traditional studios pivot their strategy from profit to growth, not only is the competition raising subscription prices and reducing content spend, but they are again licensing content to NFLX — even DIS and HBO.”

Tesla

What impact on margins from price cuts? What about Musk saying he could develop AI outside of Tesla? Delivery numbers were sound, representing 38% volume growth year-on-year, albeit this constitutes a mild slowdown from the 40% growth last year. Last quarter earnings disappointed as revenues dipped below reduced expectations, sending shares lower. Tesla’s third quarter revenue was $23.4bn vs analyst expectations of $24.09bn. Total gross profit declined 22% year-over-year, with net income down to $1.9bn from $3.3bn a year ago. Price cuts are gnawing away at margins – ex-regulatory credits margins slipped to 16.3%, the lowest since 2017 and below forecast. A year ago they were 26.8%.

Gold and Oil

Oil notched a weekly gain amid the swirling tensions in the Middle East but there is not a heck of a lot of geopolitical risk premium and prices are softer this morning despite risk catching a bid. Momentum still looks bullish but price action is sketchier and trending to drift sideways to the completion of the wedge. Consider a possible breakout.

Gold – momentum is bearish; but for now holding the trend and held at the 50-day SMA for now – just; 21-day EMA now acting as resistance.