The sea still feels a little choppy

Wall Street returned from the Martin Luther King holiday, catching up on events over the last couple of days. We had been cautious about the potential for a sell-off due to elevated optimism at the start of the year. Every sentiment survey you cared to study screamed greed; it was never going to take much to induce a little panic. There was no marginal buyer left. So far, Wall Street has given up the gains made at the start of the year and is now slightly in the red. Some will quote the old adage: “What happens in January sets the trend for the year.” We shall see.

Some will cite Trump and Greenland as the cause, which it may well be, but geopolitics rarely has a material impact on stocks unless it induces a sharp move in commodity prices. The start of the Ukraine-Russia conflict is a good example of that. Others will look to what is going on in Japan, and the spike in yields after Prime Minister Sanae Takaichi confirmed speculation by calling a snap election for Feb. 8 in a high-risk gamble to give her a stronger mandate. One thing that is worth commenting on is that, normally, in periods of “risk off”,  the US dollar rallies as it is considered a safe haven, but that was not the case yesterday. For those looking for where stocks could correct to, the S&P 500 last night slipped through the 50-day moving average at 6550, which could be the next stop, or even 6350, its 200-day moving average, which would be close to a 10% correction.

Closer to home, we had the latest employment data out for the UK yesterday, not much to say, unemployment remains at levels not seen since covid and wage growth in excess of inflation. The only point one would make here is that public-sector wages grew by almost 8%, while private-sector wages grew by less than half that. The latest inflation data showed a small month-over-month increase, and the year-over-year annual inflation rate is now 3.4%, up from 3.2% in the previous month. Producer input prices came in a little better than expected, and output prices were in line. Will all this make a few headlines? Quite possibly, will it unduly influence the Bank of England? Unlikely.

I forgot to mention, Davos starts this week, a lovely week in the snow for well-heeled bankers and a few political leaders who like to be seen and fancy a jolly. Does it actually achieve anything? If it does this year, it will be a first. JGB prices have modestly recovered overnight. Should that hold, we may get a modest recovery in stock prices. Our view, may be a bit early to jump in just yet.