S&P500 was down for the first time in the year due to the reignited recession concerns. The hawkish comments from central bankers and economic data also gave downward pressure on the equity market. A large number of options, including single-stock and index, expired last Friday. The market participants are expected to trade freely in the coming week. Volatility came back due to the more layoff announcements and below-average earnings.
ECB: The president of the ECB commented that the reopening of China could push inflation higher because of the spillover to economic growth in Europe and the demand for energy. Thus, they are going to stick with their hike cycle plan in order to fight against inflation.
BoJ: The core consumer prices rise 4% YoY in December, the highest in more than 40 years, mainly driven by food and energy prices. More speculation on a BoJ pivot as the pace of inflation growth is 2 times faster than the BoJ target, although it is aligned with expectations. Inflation in Japan is expected to peak in either December or January due to government subsidies that lower gas and electricity costs. BoJ will stick with its YCC despite the high core CPI.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
HSBC: US equities are down as investors assessed the latest batch of earnings results, comments from the Fed and economic data. Meanwhile, European equities dropped due to the rising concerns about economic growth and the hawkish comments from the ECB speech.
Julius Baer: Although it is still too early to shift towards cyclicals, we favor automotive supply sector due to the strong demand reflected by the solid booking, moderating raw material prices, and undemanding valuations.
Morgan Stanley: Investors started to position the decline in interest rates driven by the increasing of recession risks and favorable inflation data. However, the growing fiscal deficits and tightening of central banks could offset the downward pressure on the treasury yield. The US will increase the issuance in treasury due to the risks of rising debts and deficits, putting a floor under the rates.
Credit Suisse: We recommend government bonds as inflation risks peak and growth slows down globally. Historically, US treasuries outperform cash-like returns around the end of the rate hike cycle. As typical market shifts toward recession fears begin to take over before the rate cut, and we believe there will be no rate cut this year in the US, the current focus toward lower rates is likely to persist, which favors longer maturities.
Morgan Stanley: Despite the align-with-expectation inflation data in December, we still cannot conclude that inflation is dead and are cautious about that narrative. Import prices are rising due to the weakening USD, amplifying the inflationary pressure. The inflation pressures are also in the services sector, mainly caused by the pent-up demand, labor shortage and increasing medical costs. The Fed pause is unlikely to happen in the near future.
Goldman Sachs: Market is pricing in 25bps at the February meeting and an additional 30bps by May. Based on the comments from the Fed’s officials this week, it is unlikely to see a pause in the rate hike as the officials are aiming to sustain the 2% inflation target.
J.P. Morgan: Fed will monitor closely the core services inflation data as it is correlated with the labor market and the demand for services are still strong. Fed will need to see more evidence for cooling inflation, especially in the services sector before it pauses the hiking. We expect the cooling inflation environment is leading to a more systematic approach to central bank policy, which is positive for both the bond and equity markets.
Barclays: The lagged effects of tightening are still likely to cause recessions in both the US and Europe. Although the inflation result brought back some optimism earlier, this week's data is signaling slowing growth in the US.
Morgan Stanley: Energy demand is suppressed by the warmer winter and recession in emerging markets and China. The disappointing recovery in consumption causes a decline in gas prices and demand in the US, which are around the pre-COVID levels.
HSBC: Data showed a large weekly increase in the US crude stockpile. Investors' optimism over China's reopening demand outweighed the concerns about the economic slowdown in the US. Crude oil prices rebounded.
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