Major assets seem overbought

The week kicked off positively. The Nasdaq, Russell 2000 and S&P 500 are eyeing upward levels. Congressional leaders have reached a bipartisan agreement on federal spending levels. Despite the US markets holding steady above opening lows without much effort, the Dow Jones Industrial Average stayed within a range on Monday. Though buying was fairly widespread, it wasn’t sufficient to instill confidence in achieving new all-time highs for the markets this week. This caution arises as the market seems to have factored in aggressive Fed rate cuts at the current juncture.

The runup in yields

The surge in yields continues despite recent declines in government bond yields. There’s potential for further increases, with factors such as a significant asset price drop or a sudden rise in inflationary pressures being key drivers. The latter scenario seems more likely in the short term. Anticipation is high for potentially impactful CPI and PPI reports by the end of the week, making this period crucial for benchmark yields. Market estimations via the CME FedWatch tool suggest a reduced likelihood of a US central bank rate cut in March.

USD in anticipation of hot inflation number

The dollar is strengthening as expectations for rate cuts seem to diminish ahead of key inflation number due this week. The upcoming inflation data might further fuel the ongoing upward movement in benchmark yields, likely giving the dollar an additional push. Although the dollar’s positioning isn’t as robust as the 10-year currently, it’s nearing a notable breakthrough. Should the DXY surpass the 102.60 level, technical indicators suggest a potential rise to around 104.

Gold on a volatile path

Last Friday, gold experienced heightened volatility following the release of the US Nonfarm Payroll (NFP) and ISM Services Purchasing Managers’ Index (PMI). XAU/USD dropped towards $2,025 due to higher-than-expected NFP figures, while the PMI report signaled a notable slowdown in US service activity for December. Considering that the surge in gold prices in the final months of 2023 was partly driven by expectations of rate cuts in 2024, expect gold to find considerable support once these central banks actually implement policy relaxation, causing yields to decrease. Gold might even embark on a new upward trend even before the actual rate cuts, as markets tend to anticipate forthcoming developments.

USD/JPY weakens on strong US dollar

The USD/JPY pair weakened due to a robust US dollar. The yen depreciated due to a significant strengthening of the US dollar, with reduced expectations of immediate interest rate cuts by the Fed in 2024. Recent statements from Bank of Japan (BOJ) Governor Kazuo Ueda have sparked speculation about Japan potentially moving away from its negative interest rate monetary policy to achieve the 2% inflation target. Higher-than-expected figures in the Tokyo Consumer Price Index (CPI) report could prompt a substantial sell-off in USD/JPY.

EUR/USD driven by macro concerns

The European Central Bank (ECB) and the Bank of England (BoE) are anticipated to cut rates. The timing and extent of these probable cuts will heavily rely on macro economic data from the UK and Europe. The course for EUR/USD heavily depends on the US inflation data on Thursday this week. The potential breakout aligns with the ongoing trend and is a reflection of the continued depreciation of the US dollar, driven by the diminishing possibility of the Federal Reserve initiating interest rate cuts. On the other hand, the dollar could appreciate if inflation is hot leading to rising yields.

Data from China

Despite a stronger-than-expected daily midpoint fix by the People’s Bank, the Chinese yuan declined by 0.2% due to persistently weak sentiment towards China. Inflation data from China, expected to show continued deflation through December, is due on Friday alongside Chinese trade data. This trend is anticipated to persist in early-2024.

Bank earnings in focus this week

Major U.S. banks kick off earnings season with JPMorgan Chase, Bank of America and Citigroup due to report fourth quarter and full-year results on Friday. Top lenders brought in more income from interest payments in 2023 as the Fed raised rates, helping banks to offset a protracted slump in dealmaking revenue in Wall Street divisions. Household finances have remained largely healthy since the pandemic, but some customers, particularly those on lower incomes, are starting to fall behind on payments in greater numbers. Earnings season will be a test of elevated expectations for corporate profits. Analysts expect S&P 500 earnings to rise by 11% in 2024 after increasing just 3% in 2023.

Stormy seas

Concerns about global inflation tied to the Israel-Hamas conflict are being monitored, yet the complexity of oil supply suggests it might not fully predict the situation. Shipping adjustments due to the Red Sea situation could cause delays in goods arriving from China, potentially raising prices due to shortages, a development that might impact grocery costs. Despite markets focusing more on oil prices, keeping an eye on shipping expenses could provide insights into the ongoing battle against inflation.

Oil retreats

Oil prices faced a decline after Saudi Arabia implemented price cuts, leading to a drop in its Asian crude exports to lows not seen in over two years. This move has reinforced the prevailing narrative indicating a continued weakness in global demand for oil. The U.S. WTI crude futures observed a 4.0% decrease, trading at around $70 per barrel. Despite concerns regarding global economic activity, both oil benchmarks had climbed over 2% the previous week due to escalating geopolitical tensions in the Middle East. These tensions were sparked by Red Sea ship attacks orchestrated by the Yemen-based Houthis, causing disruptions in the region’s shipping operations.

Bitcoin ETF optimism

Bitcoin initiated the new year with substantial gains, driven by optimism surrounding potential approval from U.S. regulators for exchange-traded spot bitcoin funds. The leading cryptocurrency, with the largest market cap, surged above $45,000, marking the first time since April 2022. This surge was fueled by expectations that the SEC might soon approve such applications. Market observers anticipate the SEC’s decision might be imminent, attracting a fresh influx of capital into the crypto sphere. These positive expectations notably contributed to Bitcoin’s impressive yearly gains of over 155% in 2023.

USD/GBP dependent on BoE

The U.K. is poised to unveil its GDP data for November this Friday, with economists anticipating a moderate recovery following a drop in October, largely attributed to a significant decline in manufacturing activity. Recent data indicating a rebound in the U.K.’s service sector activity during December suggests that the economy might narrowly evade a recession. This resilience comes as businesses and households navigate the challenges posed by high inflation and borrowing costs, which have surged to a 15-year peak. Concerns about the economy have prompted calls from business leaders for the Bank of England to consider interest rate cuts.

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