The Chinese returned from their Lunar New Year holiday having traveled and spent more this year than before the pandemic. The early trading hours were cheery, but enthusiasm left its place to doom and gloom quickly as the Chinese equities found it hard to extend gains on the back of looming Chinese problems, like deflation, an aging population, a deepening property crisis, and lost investors’ confidence.
As such, yesterday’s 1% advance in Shanghai Shenzhen CSI 300 couldn’t gain momentum today, even though China cut its 5-year LPR rate – which is the reference rate for mortgages - by most on record to prop up demand for its tumbling property market and hoping to stop the downturn. In vain, the equity markets didn’t react much. Nasdaq’s China real estate index continues its race to the bottom.
Equities in Europe however extended gains to a fresh ytd high, and the Stoxx 600 index continues to trade at a spitting distance from an ATH even though France lowered its growth forecast for 2024 to 1% and Germany announced a 0.3% contraction lately.
The energy crisis and higher rates are eating into the old continent and the European Central Bank (ECB) is not sure it would start cutting the rates soon enough, given that inflation risks remain tilted to the upside. Rising shipping costs, upside pressure in oil prices and the softening Federal Reserve (Fed) cut expectations threaten the price stability and some European policymakers think that it’s safer to wait for more evidence that inflation is easing sustainably than acting prematurely and looking foolish.
This is certainly what keeps the US dollar appetite contained, and the other currencies somehow supported: the fear that a delay in Fed rate cut would translate into a stronger dollar, a stronger dollar would send a fresh wave of high inflation across the globe and the latter would delay other central banks’ rate cut plans as well.
But the latter reasoning will be just enough to contain the buying pressure in the dollar, and not to reverse the greenback’s positive trend. The dollar index saw support near its 100-DMA yesterday and the EUR/USD failed to clear its own 100-DMA to the upside. The diverging fortunes between the US – where growth remains strong - and the euro area – where growth is nowhere to be found – justifies an earlier ECB cut compared to the Fed, but the ECB will cut only and if only inflation remains on a falling path.
Anyway, back to the European stocks, the Stoxx 600 performed surprisingly well this year despite the sputtering euro area economies and no guarantee that the ECB will start cutting rates before summer. Some think that the European valuations are just below their long-term average which makes them much cheaper and somehow appetizing.
But AI makes American stocks shine brighter than European diamonds. Nvidia (NASDAQ:NVDA), for example, is worth more than the entire German DAX index today and the AI premium is justified by massive, concrete AI investments and the tech companies’ high ROI. Therefore, even if the European stock valuations are more reasonable than the tech-heavy US peers, the upside potential that the US tech giants offer is incomparable to the European counterparts.
Across the Channel, the energy and finance-heavy British FTSE 100 refused to return to last year’s negative trend and rallied 3% since last week, Cable remains under pressure as the Bank of England (BoE) doves stand up against Bailey’s cautious stance regarding premature cuts.
The Bank’s former economist said that ‘it’s one thing to have missed inflation on the way up, it’s quite another to then have crushed the economy on the way down’. Premature easing, however, is not a risk that the central bankers are willing to take. The latest Reserve Bank of Australia (RBA) meeting minutes revealed that the policymakers considered to hold rates steady or a case for a 25 bp hike (scary!).
And the latest FOMC minutes due Wednesday will give more clarity on if and how the Fed members reacted to last year’s skyrocketing rate cut expectations. From what they publicly say, they think that the expectations went well ahead of themselves. There will hardly be a rate cut announced from a major central bank before June.
Today, Walmart (NYSE:WMT) and Home Depot (NYSE:HD) earnings will serve as an amuse-bouche before Nvidia’s much-expected results due after the bell tomorrow.
In energy, natural gas futures took another dive yesterday while American crude cleared the 100 and 200-DMA offers last week and is testing a major Fibonacci resistance to the upside. Trend and momentum indicators remain supportive of a further rise toward the $80pb level as tensions in the Middle East, the Chinese stimulus, and OPEC’s efforts to restrict supply are supportive factors for the bulls.
On the opposite camp, the rising supply from countries outside OPEC, China’s inability to boost growth and slowing demand growth for fossil fuel are arguments that will make the bulls’ life harder above the $80pb mark.