The US stock markets ended last week on a cautiously positive note. Friday’s producer price inflation came as a certain relief to inflation worries as the latest data showed an unexpected contraction in the monthly figure. The jump in oil prices, following the US and UK airstrikes in areas in Yemen controlled by the Houthis, which sent the barrel of American crude to past the $75pb level, didn’t last long. The barrel of US crude starts the week below the $73pb level. The risks are tilted to the upside as conflict news continues to flow in this Monday. Rishi Sunak will address Parliament as his government is ready to intensify strikes on Houthi targets. Yet there is a strong barricade into the $74/75pb level in the US crude and near $80pb level in Brent, as the rising global supply, increasing competition to OPEC and the globally weak economic outlook weigh heavier and convince the bears to sell every geopolitically supported rallies.
Rising tensions in the Red Sea and the rising shipping costs are a boon for shipping companies like AP Moeller-Maersk that see their stock prices being pushed higher. Bank stocks on the other hand traded mixed on Friday as the first Q4 earnings from some US banking giants were mixed. JP Morgan for example had a blast last year. The banking crisis that hit the smaller, regional banks drove capital to big banks like JP Morgan, and combined with the rising interest rates, JP announced the most profitable year of its history. The bank posted more than $250nb net interest income last year – its 7th consecutive quarter of record net interest income (NII). Together, the 4 major US banks made $80bn more last year than in 2021. Wells Fargo beat estimates but its prediction of 7-9% fall in NII next year sent the stock price more than 3% lower on Friday, while BAC fell 1% after missing estimates.
Despite a mixed set of results and record NII, the big banks share the same forecast for next year: their net interest income will fall next year as the Federal Reserve (Fed) is expected to cut interest rates.
Elsewhere
The People’s Bank of China (PBoC) held its policy rate steady this Monday - defying the expectation of a 10bp cut - while pumping more cash into the financial system to reverse the selloff and boost asset prices, and eventually growth. But in vain. The Chinese CSI 300 index barely reacted to the news after China posted a third negative CPI read on a yearly basis. China is still expected to hit its official 5% target this year, but the confidence crisis and the slump in property prices are not going to reverse overnight. Outlook for Chinese equities is not bright.
Taiwan’s stock exchange, on the other hand, which diverged positively from the mainland stocks last year, had a cheery start to the week after the ruling DPP’s Lai – who is pointed at as a ‘separatist’ by Beijing - won presidency and his party lost its legislative majority. The latter was seen as a good compromise for relations between China and Taiwan – as the outcome was clearly not over-provocative for Beijing. The Japanese Nikkei 225, on the other hand, hit the 36K mark on the back of a softer yen, and waning expectations that the BoJ will be normalizing at a decent speed this year.
In the FX, the US dollar kicks off the week on a slightly negative note, the AUD/USD struggles to find buyers near the lower bound of its October to now ascending channel, as the PBoC could’ve been more supportive. The EUR/USD couldn’t clear the 1.10 resistance last week, and the failure to break above the crucial psychological could weaken the euro bulls’ hands this week. Across the Channel, Cable remains cautiously bid after Friday’s GDP printed a better-than-expected growth number. The UK will release its latest inflation report on Wednesday. UK inflation is expected to have further eased from 3.9% to 3.8% in December, and core inflation is seen slipping below the 5% mark. A softer-than-expected set of inflation figures could prevent Cable from making a sustainable move above the 1.28 level.