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Risk events or risk rewards? Stocks make fresh highs

Vantage Updated Updated Mon, 2024 January 29 10:17
Risk events or risk rewards? Stocks make fresh highs

Headlines

* US Treasury cuts January-March borrowing estimates, yields fall

* Stocks make steady start to an event-packed week

* Euro underperforms as markets slightly increase rate cut chances

* Safe haven gold gains as Middle East worries mount

FX: USD nudged north in a cautious start to a week full of huge risk events. Early gains were given up as bond yields fell on lower Treasury borrowing estimates. Wednesday’s Fed meeting is the highlight. Discussion around the scale and timing of rate cuts will be key. A March rate cuts is currently just under a 50:50 bet. The DXY has been oscillating around its 200-day SMA at 103.51 for a couple of weeks.

EUR was the worst performing G10 currency as expectations of early rate cuts increased. There’s now around 26bps priced in for April and 55bps in for June.  A prominent ECB officials remarked over the weekend that they could cut rates at any time this year.  EUR/USD looks to have broken down through the 200-day SMA at 1.0841. Next support is around 1.08.

GBP continues to trade in the middle of the recent range. Relatively steady BoE rate expectations contrast with the softening ECB outlook which has taken EUR/GBP to multi-month lows. The 50-day SMA in cable at 1.2661 is initial support.

USD/JPY turned lower in the US session as Treasury yields fell below 4.10%. December jobs data is released today. The tight labour market could facilitate sustainable earnings growth. This could alert the BoJ and potential policy normalisation.

AUD and NZD outperformed on firmer China stocks. USD/CAD fell for a third day with stocks and oil prices supporting the loonie. Two failures at 1.3540 leaves 1.3410 as key support. A double top formation could be in play so a break of this neckline could see losses extend to 1.33.

Stocks: US equities made a very solid start to the week with more record highs. The benchmark S&P 500 advanced 0.76% to settle at 4,927. The tech-laden Nasdaq 100 added 1.01% to finish at 17,596. The Dow Jones underperformed closing 0.59% higher at 38,333. This was the sixth record close for the Dow. Consumer discretionary and tech led while energy was the only sector in the red. Stocks rallied after the Treasury announcement expecting to borrow less in the first quarter. Investors are preparing for megacap tech earnings releases this week.

Asian futures are mixed. APAC stocks traded mostly on the front foot. Chinese property sector concerns were elevated. These capped the gains in Hong Kong as a court ordered the winding up of Evergrande. The Nikkei 225 climbed above 36,000 amid currency effects and automaker gains.

Gold found a bid on mild safe haven demand. The 50-day SMA sits just above at $2027.

Day Ahead – Australia retail sales, eurozone GDP

Australia Retail Sales are released today with expectations for a negative print (-2.0%) after November activity (+2.0%) was boosted by changing seasonal trends ie Black Friday and Cyber-week. The ABS sees a major increase in November seasonality over recent years. December is expected to decline with weak underlying momentum and uneven sales over the holiday period.

Eurozone GDP is forecast to show a 0.1% q/q contraction versus similar in Q3. The annualised rate is seen at flat which would match the prior print. The region hasn’t yet dipped into a technical recession as yet, unlike the German economy. Stagnation is the watchword with a soft report likely to cement early rate cut bets.

Chart of the Day $3 trillion Microsoft

Microsoft results kick off a busy week of Big Tech earnings, with Alphabet also reporting after the US close. Apple, Amazon and Meta then publish their earnings after the Thursday US close. That’s five of the Mag7. Microsoft’s stock has surged in recent months, having gained roughly 60% last year. That  helped it become the most valuable company in the world earlier in January. Its market cap briefly overtook that of Apple. The two tech giants remain neck and neck in the scrap for the most-valuable-company tag, each with valuations a shade under $3tn.

Cloud services at Microsoft, (plus those at Amazon and Alphabet) will be analysed to see if recent stellar trend growth can continue. Investment in AI is a key area for markets to watch too, as Microsoft develops solutions for business and integrates its Copilot chatbot into the Windows operating system. The stock is overbought on several momentum measures across sveral timeframes.