Stock markets in Europe and the US were mostly higher last week, although the FTSE 100 bucked the trend and fell 0.8%. The Nasdaq and the S&P 500 rose by 3% and 1.7% respectively, recording their strongest weekly performance of the year so far. Risk sentiment was boosted by the sharp decline in bond yields in the US, the UK and Europe.
At the start of the week, the bond bulls may take a breather as the US has a public holiday on Monday. This could give investors time to pause and re-assess if the economic data justifies the move lower in bond yields, the 2-year US yield fell by 26 basis points last week, and the market is now expecting 7 rate cuts from the Federal Reserve between now and January 2025. The economic data has been bouncy so far, and 7 rate cuts in 12 months seems excessive. The market appears convinced that rate cuts will start in March, the CME Fedwatch tool is pricing the probability of a rate cut in March at more than 75%. However, the market is ignoring some key risks such as threats to the global supply chain, geopolitical tensions, a wave of extra Treasury supply and some hawkish talk from several Fed officials. The following few weeks will determine if the market’s optimism on rate cuts is justified.
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Create account Try a demo Download mobile app Download mobile appA bright new year for the UK housing market
Optimism about the UK’s housing market’s performance this year helped to push sellers asking prices up by 1.3% in January compared to December 2023, the largest monthly increase in 8 months, and the strongest January since 2020, according to Rightmove. The sharp decline in mortgage rates, the average rate on a 5-year mortgage is now 4.86% vs. 6.11% last summer, has driven buyer demand. Rightmove also said that buyer demand is up 5% in the first week of January 2024, vs. the first week of January 2023. The number of properties for sale is also 15% higher than a year ago. There is growing optimism that the UK housing market could thrive this year and it is worth remembering that the UK housing market has proven itself to be a resilient part of the UK economy in the last 18 months. There was no housing market crash, and repossession rates remain within normal ranges, even after a rapid tightening in interest rates from the Bank of England and the bond market volatility caused by the Liz Truss government.
China holds firm with no rate cuts
Elsewhere, China defied market expectations and held its key lending rate steady at 2.5%, economists had expected a 0.1% rate cut at this week’s meeting. This comes even though China remains in deflation and is enduring its longest stretch of negative prices since 2009. Some economists have argued that the PBOC may have chosen to hold rates steady to avoid further downside in the yuan, and excess volatility in the FX market. While rate cuts remain on the cards for China, it appears that the PBOC is taking a more measured approach than its western counterparts, and certainly will not be pressured into cutting rates by financial markets. Rather than cut rates, the PBOC may choose to boost liquidity in the Chinese banking system with a cut to the reserve requirement ratio.
A race to the summit for the Nikkei
In Japan, the Nikkei climbed by another 1% on Monday, after rising more than 6.7% in the last five days. This index has been boosted by momentum, official measures to boost domestic investment in the Japanese stock market and expectations that the Bank of Japan will start to normalise interest rates. There were broad based gains for all sectors included in the Nikkei, which shows the strength of this rally. The index still looks like it is targeting the all-time high of 38,915, from 29th December 1989. Currently the Nikkei is 3,000 points away from this milestone. If the index breaches the all-time high, the market may pause before making its next move.
Bitcoin continues its post ETF flop
European futures suggest a positive open for European indices on Monday. The oil price has backed away from last week’s intraday high of $80 per barrel for Brent crude, as tensions in the Red Sea waned a little over the weekend. A resolution has yet to be found, and there is the potential that Houthis rebels could still attack commercial vessels in the region however, $80 looks like the top in the oil price for now. Bitcoin has also continued its post ETF-trading flop and is down 12% since the ETF was granted SEC approval to trade last week. The weak performance of bitcoin could be ‘buy the rumour, sell the fact’, but it is another sign of how volatile the crypto currency can be.
The race to be the Republican nominee
The US may be out on holiday, but the Iowa Republican caucus meeting on Monday will start the 2024 Republican nomination ballot. The latest polls from Iowa show overwhelming support for Donald Trump, with Niki Haley in second place. Bad weather could hinder turnout, which could make this a tighter race than some expect. Haley has a decent chance in New Hampshire, and if she manages to get more than 20% of the vote in Iowa, then this could make the Republican nomination an interesting race. At this stage we do not think that votes in the Republican caucus will impact financial markets, unless there is a major upset.
