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US MARKETS 

Despite the latest jobless claims data affirming the resilience of the U.S. labour market, challenging expectations for a March rate cut by the Federal Reserve and nudging UST 10-year yields higher, all three major US  indexes closed higher, powered by Tech stocks. 

Even as hopes for rapid interest-rate cuts have recently been dented due to robust economic data and pushback from policymakers at the Federal Reserve and European Central Bank, a recession-free outlook for 2024 in the United States remains a huge positive for stocks, especially as the ongoing disinflationary pressures from China and Germany provide the dovish counterbalance, leaving March rate cut expectations still a coin toss. 

Although there has been a slight decrease in expectations for rate cuts by the Federal Reserve, futures still indicate a probability of more than 50% for a move as early as March. Furthermore, the futures market predicts a total of 145 basis points of easing through December. These factors may create a favourable stock market landscape if investors can stay patient.

However, the increase in longer-term bond yields has been more pronounced, with 10-year yields reaching their highest level in a month at 4.14% as supply concerns weigh.

The Treasury faced soft auction demand this week, hinting at potential challenges amid an expected increase in debt issuance this year; yields on the benchmark UST10s could remain sticky over the short term, ultimately providing the near-term Index rally capper.

OIL MARKETS

Oil futures experienced a nearly 2% increase, driven by optimistic demand forecasts from the International Energy Agency and a larger-than-expected reduction in domestic crude oil inventories.

The U.S. Energy Information Administration's inventory report on Thursday provided overall support for the oil market, indicating a 2.5 million barrel decrease in commercial crude stockpiles alongside smaller builds in refined products supplies. 

The convergence of positive fundamentals and ongoing geopolitical concerns, such as continued attacks on Red Sea shipping and retaliatory strikes between Pakistan and Iran, suggests that crude oil prices might see upward momentum driven by fears of weekend headline developments. 

Given the absence of any apparent detente in the Middle East, the hedging theme is expected to persist.

FOREX MARKETS 

USD/JPY hit a fresh high this week of 148.52 as it continues to rebound after placing a low at 140.25 on 28th December. The yen has now fully reversed all of the gains recorded in December, although it is still somewhat below last year's peak at 151.91, recorded on 13th November. The main driver is scaling back expectations for rate cuts from the Fed and other major central banks outside Japan.

Although we are experiencing a bit of a hawkish send-off to the week, the 50:50 coin toss probability of a March Fed could hold topside USDJPY in check.

At its January meeting, Tokyo's economists expect the Bank of Japan ( BoJ) to maintain its policies for the Yield Curve Control (YCC) and negative short-term rates. So, a wild card scenario is a YCC tweak.

 Inflation is expected to slow down in January. Hence, a cautious BoJ approach will most likely prevail, especially after the recent earthquake.

CHINA MARKETS

China remains in the spotlight following recent discouraging economic data and concerning demographic trends. China's nominal growth in the previous year, factoring in a year of price deflation, reached its lowest point since 1976, and its population experienced a second consecutive year of decline.

Despite this, speculation about potential new stimulus measures and purchases by state-backed investors helped stabilize market sentiment on Thursday. After initially hitting a new 5-year low with the highest foreign net selling in over a year on Wednesday, China's benchmark stock index rebounded by 1.4% at the close. 

Increased trading volume in several large-cap ETFs, often utilized by state-backed funds, indicated support from these institutions, known as the "national team" investors.

However, the feasibility of this endeavour largely depends on one's access to Mainland markets, as many investors are limited to a selection of ETFs, ADRs, and Hong Kong shares.

The HSI, at the best of times, can be the equivalent of a retail crap shoot, and regardless of one's positioning, it is crucial to acknowledge that the evaluation of Chinese shares cannot be conducted using the same metrics, measures and mental frameworks employed in assessing other markets. Traditional fundamentals are rendered irrelevant in this context. The only "fundamentals" that carry weight are those associated with the machinations of the ruling Party. However, due to the opacity of Party deliberations, assessing these fundamentals in China remains an elusive task.

I believe there's a degree of misrepresentation from commentary via Mainland banks, brokerages, and investment houses for a broader audience outside of China. Every time, a Politburo pump is typically followed by some hype urging investors to allocate to Mainland shares that have experienced significant derating.

Investors who willingly take on exposure to the precarious situation in China need to know the risks or may find themselves at the mercy of an unpredictable and authoritarian financial landscape. Engaging in the seemingly futile exercise of "buying the dip" in Chinese equities can be risky.

Despite the potential for a quick and meaningful windfall, the reality these days remains that luck often plays a more significant role. Success is contingent on buying shares that avoid government scrutiny, making the entire investment process more akin to a game of chance than an informed decision-making process.

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