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Markets

Investors were rebalancing their positions in U.S. stocks, bonds, and the dollar overnight, leading to minor market movements. Traders were preparing for a deluge of economic data, focusing on the Personal Consumption Expenditures (PCE) deflator and comments from Federal Reserve speakers that could provide insights into the possibility of the Fed's first rate cut.

The S&P 500 index declined marginally after Alphabet Inc. experienced a downward correction due to renewed concerns regarding potential setbacks in its artificial intelligence initiatives. Still, it wouldn't take much negativity, given the recent summit climb, for AI investors to pull some chips off the table.

The ongoing rates debate continues into the new week without significant resolution or change. Monday brought little color as market participants observed a familiar landscape, with traders and investors bracing for a busy data calendar, and the update on the Fed's preferred price gauge ( PCE) is of keen interest.

It's conceivable that market expectations for the Fed in 2024 might diminish on a hotter PCE print, potentially leading traders to no longer anticipate three full quarter-point cuts. However, such an adjustment might not solely be influenced by seasonal price pressures in January, where companies commonly front-load price rises in the hopes that consumers will forget about them as the year progresses. Other economic indicators and Fed communications will likely be needed to significantly reshape the dot plot more hawkishly.

Given the hotter-than-expected January CPI and PPI prints, traders know the PCE tea leaves readings, so the shock value will likely be a downside miss. Hence, barring a significant upside surprise, the market will likely overlook or discount the event's impact.

Investor positioning is highly concentrated, but the Mag7 pump fosters a significant fund shift from cash to risky assets. This rotation could further bolster bullish sentiment and positioning if the rotation moves into full swing.

Still, targets are being raised based on the belief that earnings are strong, but there are concerns that profit margins may have reached their peak. Interest expenses could increase if corporations need to refinance, and softer producer prices may negatively impact margins. Additionally, labour costs remain elevated. It's worth noting that Mag 7 has been responsible for all of the S&P's profit growth over the past few reporting periods.

While this does not suggest " Bubble Vision," today's market environment, characterized by high concentration in specific sectors and the follow-the-leader mentality that Mag 7 stocks tend to exhibit, raises concerns about the sustainability of rally expectations, mainly if those profit expectations are not met.

All in all, investors are taking a well-deserved breather to start the week.
 

Asia Markets

In contrast to the previous week's exuberance, Asian markets have commenced this week with a more cautious demeanor. The MSCI Asia ex-Japan index registered its most substantial decline over a fortnight. Chinese equities experienced a 1% retreat, marking the end of their longest winning streak in six years. This subdued tone suggests a moderation in investor sentiment following the recent tech-driven buying spree.

In Japan, CPI inflation has surpassed expectations, sparking renewed market discussions about the possibility of the Bank of Japan (BOJ) raising interest rates as early as next month, although April remains the favored timeline. The prevailing theory suggests that the BOJ might find it easier to proceed with policy normalization, with inflation surpassing the target. However, currency markets have shown little response( still trading + 150.50 USDJPY), with many traders expressing skepticism about the likelihood of the central bank raising rates in March amid a technical recession.
 

Oil Markets

Oil prices rebounded, erasing earlier losses, driven by market expectations of an extension to the Organization of the Petroleum Exporting Countries (OPEC) and allied producers' output cuts into the second quarter. The anticipated rollover of 2.2 million barrels per day (bpd) in production cuts is aimed at stabilizing the physical oil market amidst growing production levels outside the coalition of 22 members.

Despite ongoing concerns about global oil demand trailing production growth, the market remains skeptical that OPEC+ will risk undoing the current curbs, which could precipitate a significant decline in oil prices.

However, the bullish impact of OPEC+ cuts is tempered by sustained production growth outside the coalition. In the United States, oil operators maintained a record-high production rate of 13.3 million bpd for the third consecutive week through February 16, according to the latest U.S. Energy Information Administration data. Moreover, Baker Hughes reported on February 23 that the number of active oil rigs in the U.S. reached an 11-week high of 503, signaling ongoing expansion in oil production capacity.

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