In Focus Today:
Economic Data Watch: Attention is directed towards Germany and France as they release inflation data, providing insights into the upcoming euro area inflation report. In the US, a fresh round of labor market data is expected with the release of the ADP employment report for December and initial jobless claims.
Geopolitical Concerns: Tensions between Hezbollah and Israel escalate, raising fears of potential spillover effects on the ongoing conflict in Gaza. Investors are closely monitoring developments in the region.
Economic and Market Highlights:
Overnight Developments:
The Caixin services PMI from China surged to 52.9, marking the fastest expansion in five months. The composite PMI, combining manufacturing and services, rose from 51.6 to 52.6, signaling a rebound in growth after a challenging 2023. Despite positive data, risk sentiment in Asian markets remains negative, leading to declines in equity indices.
Yesterday’s Market Movements:
Global markets continued a risk-off sentiment amid uncertainty regarding monetary policy outlook, resulting in volatility across asset classes.
Yields initially rose during the session but reversed most of the gains in the evening due to soft US data and the release of FOMC minutes.
The December FOMC minutes presented a balanced view, with both hawkish and dovish signals. Members acknowledged controlled inflation but expressed concerns about potential damage from overly restrictive monetary policy.
ISM manufacturing index for December remained in contractionary territory at 47.4, while JOLTs data showed a gradual cooling of the labor market, with job openings rising less than projected.
Equity Markets:
Profit-taking led to sharp declines in US, European, and Nordic equities. Despite goldilocks-like scenarios in the FOMC minutes and macro data, excess optimism and stretched positions contributed to the sell-off.
Defensive rotation was observed, with rate-sensitive sectors like utilities, healthcare, and communication outperforming. Cyclicals, including real estate, consumer discretionary, industrials, and materials, experienced losses.
While fundamentals support an equity overweight, low VIX levels indicate potential bumps in the road ahead.
Fixed Income:
Global yields increased during most of the session, influenced by US data and FOMC minutes. However, some retracement occurred towards the end.
10Y government bond yields in Germany and the US slightly declined, with the ASW spread for Bund tightening to its lowest level since early 2022.
Foreign Exchange:
USD strength persisted, with a minor retracement following the FOMC minutes. Poor risk sentiment affected DKK and SEK, while NOK found relative support from rising oil prices.
JPY underperformed against USD, with USD/JPY rising above 143. On the other end, GBP posted a gain of 0.4% against the USD.
As global markets navigate economic data releases, geopolitical tensions, and central bank signals, investors remain vigilant amid potential shifts in sentiment and market dynamics.
