After a strong end to 2023 on expectations of early central bank rate cuts, markets have started 2024 undergoing the equivalent of a bit of a cold shower, slipping lower on the week, while the US dollar and yields have rebounded as better than expected economic numbers prompt a recalibration of expectations around when we can expect to see these cuts take place.
Europe
This week’s mood hasn’t been helped by a rebound in inflation numbers in December, alongside concerns that the events in the Red Sea will put upward pressure on inflation after shipping company Maersk announced that it would be sending cargoes around the Horn of Africa until further notice due to concerns over transits through the Red Sea and Suez Canal.
Today’s US data has done little to make the economic picture clearer with a strong December payrolls report, followed by a weak ISM services survey, which helped to pull yields off their highs of the week, and the US dollar to close off its highs.
Drinks maker Diageo shares are lower after China announced it was announcing an antidumping investigation into products like Brandy imports from the EU. While Diageo isn’t known for having any brandy brands there is a concern that China might expand its investigation into other liquor products like vodka and whisky. French brandy maker Remy Cointreau is seeing the biggest falls, along with Pernod Ricard.
Endeavour Mining shares are also lower after it was announced that the company had sacked its CEO Sebastien de Montessus for serious misconduct following an investigation into an irregular payment made in relation to a company asset disposal in 2021.
After pushing up to fresh record highs yesterday, Next shares have slipped back after HSBC cut the shares to “hold” from the previous “buy” recommendation.
US
US markets have managed to shrug off some of their losses from yesterday's opening and pushing higher after the latest jobs report showed that 216k jobs were added in December, while wages edged up to 4.1%. The unemployment rate slipped to 3.7% undermining the idea that the Federal Reserve would be forced to cut rates in March, however the resilience of the payrolls numbers jarred against a weak set of ISM services numbers which showed that part of the economy was less resilient than the headline payrolls data suggested.
The ISM employment component slumped from 50.7 to 43.3, dragging the headline number down to 50.6. Prices paid on the other hand remained resilient at 57.4, serving to paint a rather mixed picture of hiring and price trends in the US economy.
On the basis of today’s numbers, the US economy appears to have maintained its resilience into the end of 2023 with little sign of the recession that markets have become increasingly fearful of, and while today’s market reaction has been relatively subdued, we still look set to post the first weekly decline since October last year.
Today’s main movers have included Palantir which was on the receiving end of a downgrade from Jefferies to underperform with a lower price target.
Tesla shares are also on the back foot, down for the 6th day in a row after the electric car company had to roll out an over the air software upgrade to all of its cars in China due to problems with its autopilot feature.
FX
It’s been a weak end to a strong week for the US dollar with today’s December payrolls report underlining a resilient US labour market and dealing a modest blow to the narrative that took hold in the dying embers of 2023 that the Federal Reserve might have to cut rates in March 2024.
That said a disappointing ISM services report has taken the gloss off the greenback’s weekly gains with the Norwegian kroner having a strong day, along with the pound which has managed to eke its way into positive territory for the week helped by short covering as the overwhelming negativity from last year gets unwound after this week’s economic numbers showed that the UK economy may have avoided a recession at the end of last year.
The worst performer has been the Japanese yen as the rate sell-off seen at the end of last year has continued to unwind this week.
Commodities
In the last few days gold prices have retreated from their December peaks in response to a rebound in the US dollar and a firming of US yields as traders pare back rate cut bets, which at the end of last year saw markets pricing in the prospect of a cut as soon as March. Today’s US payrolls report has served to undermine that idea with prices set to end the week lower for the first time since early December.
Brent crude oil prices have continued their rebound from 2-week lows and the 200-week SMA as concerns over supply risk from the Red Sea area, as well as North Africa prompt some modest buying.
Volatility
Fast food giant McDonald’s saw its stock dip lower in Thursday’s trade after the CEO noted it was experiencing a meaningful hit to business as customers across the globe boycotted the brand from its perceived support of Israel. It’s worth noting that the price reversion here comes off the back of strong gains through the last quarter of 2023 and the stock had been trading close to all-time highs, but the admission of the impact here underlines the scale of the squeeze being felt. One day vol on McDonald’s stood at 42.53%, almost double the one-month figure of 22.07%.
Despite a significantly smaller draw on US Natural Gas inventories that had been forecast, the underlying price continued to find support through Thursday’s session. That’s also despite reserves being above longer-term averages and whilst there are concerns that the weather could turn colder in the coming weeks in turn bolstering demand, gains for the underlying have now exceeded 25% over the last three weeks. One day vol on Nat Gas stood at 66.62% against 59.66% for the month.
The BT Group share price remains rattled by news that it has missed a deadline to remove kit supplied from Huawei from its network. This leaves the door open to financial penalties and whilst the bigger move here was seen on Wednesday, yesterday’s rebound off recent lows has been adding to levels of price action. One day vol stood at 53.81% against 41.37% for the month.
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