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MARKETS

US stocks relinquished earlier gains as traders tempered their earnings-related enthusiasm when caution set in after Tesla profits fell amid declining demand for electric vehicles, compressing margins.

Tesla (TSLA) reported Q4 earnings that fell short of Street estimates and provided a pessimistic full-year production outlook, causing a further decline in the stock and continuing the downward spiral for the electric vehicle (EV) maker that began at the beginning of the year.

With stocks sliding from the summit, there is even more anticipation ahead of a plethora of US economic data, including Gross Domestic Product, as traders continue drawing and discarding cards on the timing of a potential interest rate cut by the Federal Reserve. A policy trajectory that now heavily relies on incoming data where various permutations could swing the pendulum of a March rate cut in either direction. Currently, the Goldilocks nature of sustained growth and receding inflation, with the prospect of 75 basis points cut and potentially more by the Federal Reserve, presents a favourable scenario for the equity market.

Preliminary data for January revealed that business activity in the US private sector expanded fastest since June, according to the flash print on S&P Global's composite gauge. The index rose to 52.3 from December's 50.9, marking the third consecutive month of expansion.

The services print at 52.9 exceeded consensus expectations, while the manufacturing gauge surged to a 15-month high at 50.3, pushing both indicators above the 50 demarcation line for the first time since October. Despite manufacturers raising output prices at the quickest pace in nine months, the slow increase in services-side selling prices offset the inflationary impact, resulting in the overall rate of price increase across the US economy being the slowest since May 2020.

Any way you want to slice and dice, this data screams a Goldilocks scenario for the US economy. But with the services print, where sticky inflation is hiding out, exceeding consensus expectations, it is not an ideal welcoming doormat for a March rate cut.

US BOND MARKET 

The recent 5-year auction in the United States experienced a significant tail, falling short by 2 basis points and concluding at a level slightly higher than subsequent market levels. 

Following this auction disappointment, the 10-year yield rose above 4.15%, and there is a prevailing expectation that it might reach the 4.20-25% area as the anticipated March rate cut continues to diminish. 

While advanced US GDP will carry some weight, the real challenge for higher yields lies in the spotlight on core Personal Consumption Expenditures (PCE) data. If the data aligns with or, more notably, falls below expectations, it can potentially prompt a significant decline in yields. Such an outcome would confirm the market's Goldilocks interpretation of inflation, offering positive prospects for stocks but potentially creating headwinds for the dollar. This is especially relevant in a market that remains vigilant about the potential for an upward drift in yields.

CHINA MARKET

Asian markets will be closely observed to determine whether the positive shift in investor sentiment towards China and Hong Kong persists. The recent action by the Chinese central bank, injecting liquidity and providing support for asset prices, has influenced the market dynamics and raised anticipation regarding its sustained impact.

Pan Gongsheng pre-announced instead of surprising the markets with a forthcoming reserve requirement cut for banks a day before the official announcement. 

The upcoming reserve requirement ratio (RRR) cut, the first since September, is set at 50 basis points, marking the first half-point reduction in over two years. 

This move comes amid a persistent stock selloff, with H-shares reaching near two-decade lows and the Mainland benchmark hitting five-year lows. Rumours are flying that Beijing might assemble a two-trillion-yuan stock rescue package following unsuccessful measures in 2023. 

But the RRR cut, aimed at increasing credit supply, drove a two-session surge in Hong Kong-listed Chinese shares, with A shares getting into the act yesterday.

However, sentiment remains woefully poor, and credit demand is weak, reflecting lacklustre domestic consumption. 

While the RRR cut addresses credit supply, it doesn't tackle the root issue; hence you can lead a horse to water, but you cannot make him drink.

Fiscal stimulus in this context is crucial, emphasizing the need for government spending when the private sector is hesitant.

The fundamental problem lies in the Party's confidence crisis with domestic and foreign investors. A good start would be to usher in a shift towards transparency.

Although the RRR cut freed up a significant amount of liquidity, it remains uncertain whether these measures will have a substantial impact. A more comprehensive approach, combining fiscal stimulus with improved credibility, may be necessary to address the ongoing challenges in the Chinese market.

The recent trend of pre-announcing critical data and policy decisions in China has raised questions about the unusual shift in communication strategy. The move to provide advance notice, such as Premier Li Qiang revealing annual growth figures for 2023 and Pan Gongsheng announcing an upcoming reserve requirement cut, is atypical and has sparked curiosity about the motives behind this approach. Maybe it is all about transparency?

FOREX MARKET

The Bank of Japan has introduced a lot of volatility in the FX markets, leaving traders swaying at the mercy of the next gust from macroeconomic data. Hence, judgement calibrated to one's context transfer remains the key, especially in a market where finding a trend to ride is infinitely complex. 

OIL MARKET

Crude oil prices experienced a modest 1 percent increase on Wednesday, propelled by several factors. These included a more substantial-than-anticipated drawdown in United States crude inventories, a weather-induced decline in US crude production, economic stimulus measures in China, and geopolitical tensions. The primary catalyst for the recent surge was the Energy Information Administration's report of a significant drawdown of 9.2 million barrels last week, surpassing analysts' predictions of a 2.2 million-barrel draw.

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