All eyes on US data

Stocks in Europe and the UK benefited from rotation flows yesterday, while tech-heavy US peers remained under pressure, with the Nasdaq 100 leading losses among the major indices. This morning, futures on both sides of the Atlantic are pointing lower.

In Asia, the Nikkei is down more than 1.2%, slipping below its 50-day moving average. The move comes after a recent spike in Japanese long-term yields — which look more stable today — and a stronger yen ahead of Thursday’s Bank of Japan (BoJ) decision, where the BoJ is expected to announce a rate hike.

What’s interesting is that this hawkish divergence from the BoJ has not translated into a stronger yen against majors since the start of the year. On the contrary, the currency has remained under pressure, weighed down by still significantly lower yields compared to other major economies.

The recent move of the Japanese 10-year yield above the 1.70% mark — often cited as the level at which foreign investments become less attractive for Japanese investors once hedging costs are considered — has created some stress among global risk investors. However, some market participants point out that Fed liquidity conditions remain ample, and may even become more supportive under the Reserve Management Purchases (RMP) programme, which is expected to inject around $40bn per month into the system. For context, that is roughly half the monthly pace of QE following the global financial crisis. In that sense, the Fed’s liquidity stance may help temper concerns linked to rising Japanese yields and the behaviour of large Treasury buyers.

That said, overall market sentiment is not particularly strong at the start of the week. Investors are focused on upcoming US jobs, retail sales and inflation data. Jobs and retail sales are due today and are expected to confirm a softer labour market alongside resilient consumer spending.

There are lingering questions around data quality following recent shutdown-related disruptions to data collection, with some arguing that December figures may offer a clearer picture of labour-market conditions. Still, today’s data should provide an early indication of how markets react.

For jobs and sales, the familiar dynamic applies: “good news is bad news, bad news is good news.” Strong data reduce the case for Federal Reserve (Fed) rate cuts — bearish for stocks and bonds, supportive for the US dollar. Softer data increase the likelihood of cuts, supporting bonds and equities while weighing on the dollar. But data that are too weak would also hurt earnings expectations, making the market reaction a delicate balancing act.

There is an additional nuance. The prevailing narrative matters — and sentiment in tech, which has driven markets since early 2023, has deteriorated. Investors increasingly focus on the risks — heavy investment, rising debt and uncertain paths to monetisation — rather than the growth and productivity upside. As a result, even a data mix supportive of Fed easing may fail to lift tech sentiment and instead reinforce the rotation trade. If so, gains in the tech-heavy S&P 500 and Nasdaq 100 may continue to lag those of the Dow Jones Industrial Average and small- and mid-cap indices.

In FX markets, the US dollar remains broadly under pressure — slightly steadier this morning, partly offset by yen strength — but the broader outlook for the dollar remains negative. That said, one chart stands out: markets are pricing roughly two Fed cuts next year versus one implied by the Fed’s latest dot plot. Given the wide divergence of views within the Fed, the median forecast may not offer reliable guidance. Still, with positioning heavily skewed against the dollar, it raises the question of whether the greenback is due for a short-term rebound.

Dollar weakness continues to support gold, silver and copper, and the outlook for metals remains constructive as confidence in fiat currencies erodes amid rising developed-market debt levels.

Oil prices continue to fall despite a softer US dollar and last week’s tensions around the seizure of a sanctioned Venezuelan vessel. The prevailing view is that sanctions-related events primarily affect sanctioned barrels themselves, with limited spill-over to WTI and Brent unless they materially alter long-term global supply. With non-sanctioned supply currently ample, geopolitical headlines are having little impact on benchmark crude prices.

By contrast, a potential peace agreement involving Russia — which could bring Russian oil back into the non-sanctioned market — would add to global supply and weigh on prices. It is possible that markets are increasingly pricing such a scenario, which could help explain why US crude is testing the lower end of this year’s range despite last week’s Fed cut and a cheaper US dollar. WTI is trading near $56 per barrel this morning. I would expect solid support around $55 and a potential rebound from that area.