The new week has started positively for most of European stocks, with the FTSE breaking to a fresh high for 2022, reaching its best level since before the pandemic. While most European indices rose, US futures were flat, with the Nasdaq 100 futures recovering from an earlier drop. US stocks and bond markets are shut for a holiday.
Sentiment remains buoyant for EU and UK stocks as investors continue to look through the current wave of the infections. The relatively lower mortality rates of omicron variant, coupled with ongoing vaccinations efforts, has raised hopes we will transition to endemic and that the economy will recover strongly in the months ahead. News that China’s central bank has cut interest rates overnight to counter the slowdown there has helped to boost sentiment further, especially as the slowdown in the country’s GDP growth to 4% was not a bad as some had feared.
On a micro level, Unilever was the standout loser this a.m. as its shares slid to the bottom of the FTSE after it defended its £50bn bid for the consumer health unit of GlaxoSmithKline. Shares in GSK meanwhile rose to the top of the FTSE.
The UK benchmark index nonetheless broke out:
Source: ThinkMarkets and TradingView.com
The FTSE could be heading towards 2020 high of 7680/5 area next. Just below this target lies the 161.8% Fibonacci extension of the downswing from November. Support comes in at 7570, followed by 7510/20 area.
Looking ahead
Something that has become clear over the last couple of weeks or so is a clear
disparity between the performance of European and US stock markets. It looks like investors are preferring the appeal of European markets due to a relatively more dovish central bank and the potential for a strong rebound in economic growth as nations ease travel restrictions amid ongoing booster vaccination efforts. In the US, monetary policy is going to be tightened this year and this has reduced the appeal of growth and overvalued technology stocks and as investors grow worried about the health of the world’s largest economy.
Indeed, Friday saw the release of
disappointing US December retail sales – which dropped by the most in 10 months – and industrial production, suggesting the economic recovery slowed down just as omicron started to spread in the US.
Soaring inflation is eating into consumers’ disposable incomes. Last week, we found out that consumer prices rose to their highest level since the 80s at a whopping 7.0%, while producer prices also remained near 10% year-over-year. With WTI crude climbing to $84, gasoline prices should remain elevated and further underpin inflationary pressures and undermine disposable incomes.
The
Federal Reserve is getting worried the rapid rise in inflation and signs it is not going to ease back towards the 2% goal any time soon. Multiple officials came out last week to speak about inflation and the Fed’s monetary policy response, ahead of their January meeting blackout period. They have made it quite clear that interest rates are very likely to start going up from March. In 2022, there will likely be 3 or even 4 hikes.
Yet, the
dollar hasn’t exactly been surging in response. The greenback fell back last week amid concerns that omicron and high levels of inflation is going to hurt the world’s largest economy. But with the Fed growing more hawkish after being head and shoulders above the likes of the BoJ and ECB in terms of its readiness to start policy tightening, the
downside risks for the dollar should be limited going forward.
On the earnings front,
stock investors got a snapshot of the financial standing of the economy on Friday, but it wasn’t a great picture as JP Morgan and Citigroup saw their shares decline on the back of disappointing fourth quarter results. Banks will remain in the spotlight in the week ahead as the earnings season gets going. Bank shares have benefited in recent times, owing to rising interest rate expectations and ongoing rotation into value stocks and out of growth.
Will we see better showing from the likes of
Bank of American, Goldman Sachs and Morgan Stanley in the week ahead? But with expectations being sky high, investors won’t be easily impressed.
Economic and earnings highlights
Monday: China GDP 4% y/y vs. 3.3% eyed; retail sales 1.7% y/y vs. 3.8% expected and industrial production +4.3% vs. 3.7% forecast.
Tuesday