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MARKETS

US stocks edged higher Monday, with the S&P 500 and Dow notching another record-high close. Investors became more optimistic about the economy's health and looked to upcoming earnings reports for signs of an AI boom for tech companies. Tech earnings and corporate guidance are crucial factors for continuing to drive the Mega Tech charge.

After an AI-generated bull run, a Goldilocks sentiment lift from the University of Michigan survey, and a challenging January summit climb, rally momentum has slowed at the start of the week as investors enter the thick of tech earnings season. Simultaneously, a series of central bank meetings in various parts of the world may keep investors on their toes. While no significant changes are expected in developed market monetary policy, guidance will be closely observed, especially from the Bank of Japan.

Investor macro focus is on fourth-quarter US GDP data. A favourable print could lead to higher US yields, raising doubts about the timing of the Fed's first rate cut.

So, given a conceivable threshold regarding equities where a reduced expectation of Fed cuts could turn negative, markets have shifted into data-watch mode.

Still, market participants are confident that the Fed will make its policy rate less restrictive in response to slowing US inflation. The release of the latest US PCE deflator report for December, expected on Friday, is anticipated to confirm that inflation pressures slowed sharply in the second half of last year.

The Bloomberg consensus forecast is for the core PCE deflator to increase by 0.2% M/M. If confirmed, the Fed's preferred measure of underlying inflation pressure slowed to an annualized rate of 1.9% in the second half of last year. This reading should give the Fed and market participants more confidence that inflation is returning to its 2.0% target and open the door to H1 rate cuts.

And while it is a bit too early for the Trump trade to kick in based on his suasion for lower rates and softer regulation, some investors are starting to point in that direction as his party nomination and perhaps his ascendancy to the White House might become little more than a race for a running mate.

CHINA MARKET

The Hang Seng is still over 50% below its 2021 record high, and H-shares have dropped nearly 60%. The Hang Seng China Enterprises Index fell nearly 2.5% on Monday, bringing its January decline to 13%.

Another negative session could push H-shares to their lowest levels in nearly 20 years. This is happening while US equities are at record highs, highlighting the stark contrast in economic performance.

On the Mainland, the CSI 300 is down over 6% in 2024, and investors seek returns in any place except China.

The persistence of the Mainland market collapse is nothing short of remarkable, given officials' attempts to stabilize the market through measures like short-selling bans and state-buying. Suggesting there is far too much tampering and artificial prop-up to suggest anything is ordinary. Hence, these efforts have fallen far short, with investors now thinking that Chinese authorities have limited options to put a floor under equities in the face of concerns about authoritarian rule in Beijing.

Talk is running rampant about the need for unconventional measures, such as helicopter money, to rekindle domestic demand and rescue sentiment. But perhaps the biggest issue with liquidity infusions is that they will end up flowing into US equities or Australia-ASEAN and North American West Coast real estate. And any further action to restrict outflows will make the onshore equity market even more non-investable to global investors. The days of cheap dollar-based financing poured into China have entirely vanished.

FOREX MARKET

Market participants have shifted their expectations for the Bank of Japan (BoJ) to exit its negative rate policy. The likelihood of the BoJ raising rates or adjusting Yield Curve Control (YCC) policy settings at the upcoming policy meeting appears highly improbable. The recent outcome of the BoJ branch managers' meeting leaned overly cautious due to the economic fallout from the recent earthquake. Hence, there was nothing in the tea leaves from Tokyo to suggest a post-BoJ yen rally was in the offing.

With the prevailing expectation that there will be no change in BoJ policy at the upcoming meeting, the yen's performance will be influenced by the updated guidance provided by the BoJ. The yen could further weaken if the central bank does not signal a potential rate hike in H1. However, a notable bearish trigger for the yen could emerge if the BoJ lowers the core-core Consumer Price Index (CPI) projections.

OIL MARKET

Global supply disruptions have propped up the market to start the week amid the Middle East conflagration, which continues to underpin oil prices.

The Bakken basin oil fields shut-in of some 280,000 bpd due to frozen well heads was compounded by Russia's decision to suspend operations at the Ust-Luga export terminal in the Baltic Sea due to a Ukrainian drone attack on the facility, which typically ships 700,000 bpd.

In a separate development and providing relief to physical buyers, Libya's National Oil Company lifted force majeure on production from the Al-Sharara field after a two-week disruption caused by anti-government protests. The 300,000 barrels per day oil field had been shut down on January 7 due to protestors' demands for equitable access to fuel supplies and improved road infrastructure.

In 2023, the demand for crude oil proved to be more robust than initially anticipated. However, despite the strong demand, prices remained low due to unexpectedly robust growth in supply. A parallel situation is unfolding as we transition into the beginning of 2024. The resilience of U.S. demand and strong demand in Asia and Emerging Markets (EM) has continued. Yet again, the supply side has outpaced the demand, keeping a lid on oil prices.

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