Markets start the week on the back foot

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The first down week for US stocks in nine as the pendulum of investor sentiment swung the other way, as this week’s release of the Fed minutes pushed out the market expectations for when we may get the first US rate cut. Until Wednesday, the odds of a March cut were greater than 50%; that is no longer true. Bond markets also had a fairly miserable start to the year. So goes the first week, so goes the year, is an oft-quoted adage, and two of the worst years in recent history for stocks, 2008 and 2022, started with a poor first week. Having said that, I am unsure how much real evidence there is to support this theory over the years. The sectors that retreated in the first week were those that led the rise in the past quarter, tech and consumer discretionary.

 On Friday a stronger-than-expected jobs report was tempered by weaker ISM service sector data. In the end, after three down days, the stock market eked something of a small gain on Friday. As has often been the case in the past couple of years, there has been a strong inverse correlation between US stocks and the dollar, and this week was no different as the greenback rose just over 1% on the week. The market is still anticipating the Fed will provide five rate cuts this year, which does feel demanding, even if we get that US interest rates will still be at 4%, a far cry from the levels over the past many years.

This week sees the start of the Q4 earnings season on Friday, and as is now the case, JP Morgan kicks things off. Aside from the numbers themselves, the comments from JP Morgan’s Chairman and Chief executive on his views on the economic outlook are often quoted. He has generally been fairly cautious in recent years; it will be interesting to see where he is on the soft landing debate. Can the Fed achieve what has only happened once in modern economic times, in the mid-1990s, taming inflation without causing an economic recession?

We know that this is the year the world, well, not quite all of it, but quite a large number of the population goes to the polls, and the first of such is the Taiwan elections next Saturday. XI Jinping, in his New Year address, talked about the reunification of Taiwan. It will be a tricky one for the new leadership; pacifying with China risks ceding sovereignty to China. On the other hand, saber-rattling risks the chances of a conflict. Geopolitical tensions in the Middle East continue to rise after reports of the killings of several leaders in the region and the possibility of a US-led intervention against the Houthis.

Does one now buy the dips or sell the rallies? A question traders will be asking themselves this week. Will good economic news be good or bad news for stocks? Another good question. Is Goldilocks’s porridge a tad cooler than we are led to believe? A personal view, after such a strong rally into the year and the signs that the Fed is still nervous about cutting too quickly may leave room for more of a correction yet. This week we also get the World Bank’s economic outlook for the year ahead. Stocks are starting the week on the back foot.