Markets Weekly podcast – 12 February 2024
Could the equity rally continue?
12 February 2024
Join host Julien Lafargue for fresh insights on the health of the global economy and financial markets. This week’s topics include US inflation, the latest economic news from China, fourth-quarter corporate earnings and the potential implications for equity markets.
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Julien Lafargue: Welcome to a new edition of Barclays Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist at Barclays Private Bank and, again, I will be your host today.
I’m in India today, after being in Dublin last week. We’re still trying to meet as many clients as we can to discuss our Outlook 2024.
So, it’s going to be just me today, but, as always, we are going to review what happened last week and take a quick look at what is on the agenda for the week ahead.
Now, looking at last week, it was a relatively quiet week for once, but still equity markets pushed higher, allowing the S&P 500 to break above the 5,000 mark for the first time ever. The index is up some 5% this year and 22% from its October low, so quite a strong rally.
There was no real news flow on the macro front to justify this move higher. The main piece of news we got was the ISM Services in the US, which came in very hot, rising 2.9 points to 53.4 when the market was anticipating a reading of 52.
Maybe more interestingly, the prices element of that survey zoomed higher by 7.3 points on a month-on-month basis, to 64, which is the highest number since February 2023, so something to pay attention to. It looks like inflationary pressure could make a comeback.
With little in terms of macro news to go through, investors were focused on the last major batch of earnings results which, once again, were somewhat mixed though with a trend emerging recently around increasing job cuts across many industries.
The market so far has welcomed this type of news but, again, as we think about the macro picture, we need to pay close attention to that. The US jobs market in particular has been very resilient of late, but if companies are starting to prepare for a lower growth environment, we could see the unemployment rate tick higher.
The biggest focus of last week was probably China, as policymakers continue to push for its equity market, in particular, to stabilise. Last week, we saw the removal of the chairman of China Securities Regulatory Commission, in a bid from the Chinese authorities to try and inspire some kind of confidence that they will take markets seriously, and how the equity market evolves will be a key focus for them going forward.
Now, this move did provide some stability in the Chinese equity market, but the reality is that investors are still pessimistic about the outlook and, to some degree, rightly so. If you’re looking at the most recent batch of data we got from China, including inflation data, the picture looks quite grim.
In January, the country was still in deflation with CPI coming in at minus 0.8%. So, even if the Chinese authorities are trying to stabilise the equity market, there is still a big question mark for investors as to what the macroeconomic outlook will be in the region.
Finally, in terms of key points from last week, we got a strong Treasury auction, which helped to dampen some fears around Treasury supply. However, while this should have helped yields move a bit lower, what we’ve seen is the strong economic data, including this ISM Services reading, that I just mentioned, as well as hawkish Fed speak helped to support yields, and the market hasn’t really changed its expectation when it comes to interest rate cuts. From a 100% probability of a Fed cut in March, that has stabilised at around a 20% chance for the Fed to move at the end of Q1, with people more and more looking at May as the date for the first cut.
Now, what does that mean for investors? Well, nothing really seems to be able to stop the rally, at least in developed market equities. Investors continue to chase the tape as the fear of missing out, or FOMO, is back in vogue. That being said, the equity market rally hasn’t happened in a vacuum. There’s been three main tailwinds supporting equity markets: disinflation, the dovish monetary pivot that we’ve seen since the end of last year, as well as rather resilient earnings.
Yet, as we know, markets rarely go up in a straight line and expectations for a ‘no-landing’ scenario may have gone on a bit too far, at least in our view. So, we would welcome some consolidation, at least in the short term, but whether it’s about missing out or getting in at the top, fear is never a good investment adviser. So, while we could see some volatility in the short term, with important datapoints coming up, we do remain constructive over the medium term, and the main reason for that is simply that we are continuing to see strong earnings delivery.
Now, moving on to the agenda for the week ahead. Well, the main macro events this week will include the New York Fed inflation expectation survey, that will be on Monday. We will also get the US CPI for January on Tuesday. This is probably the most important release of the week. It could come in higher than expected, driven by seasonal effects and the recent jump in shipping costs, and that could be one source of volatility, as we just discussed.
Moving through the week, we’re also going to get UK inflation for January, that will be on Wednesday, followed by the US retail sales on Thursday. We will then finish the week with the Michigan sentiment and inflation expectation report for February. And if we project a bit beyond this week, there are a couple of datapoints that are worth keeping in mind. The first one will be the FOMC minutes and the second one Nvidia earnings.
Both will come out on 21 February and they could bend sentiment around two key pillars of the recent rally in equity markets, mainly monetary policy and earnings resilience, so something that we definitely want to keep an eye on. Of course, we will be back before that to debrief this week and preview those two key releases in the week after that.
In the meantime, as always, we wish you all the best in the trading week ahead.
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