Crystal ball season

Markets

Thursday's trading session brought a mix of New Year blessings, with the Dow Jones Industrial Average rising modestly, the S&P 500 declining, and the Nasdaq ending lower. As global investors assess the S&P 500's decline, it raises questions about its potential role as a leading indicator for global stocks this year, given the heavy concentration risk.

In January on Wall Street, traders typically turn to their crystal balls to decipher the market's medium to long-term direction based on early trends. However, this forecasting task is complicated by significant macroeconomic uncertainty. Attention is drawn to fluctuating oil prices amid the ongoing Middle East conflict, and an unfortunate natural disaster in Japan may have altered the Bank of Japan's plans for policy normalization. Additionally, concerns persist about Mainland China's consumption engine and the potential impact of past policy errors on consumer psychology, further complicating predictions in Chinese stock markets.

The recent impact of the Federal Reserve minutes, combined with macro uncertainty and indications of economic contraction, raises concerns about the upcoming fourth-quarter corporate earnings season. As the earnings season approaches next week, the broader economic slowdown may cast a shadow on corporate earnings—a situation that stock market operators likely wish to avoid.

The upcoming jobs report for December, scheduled for release later in the New York trading session, holds the potential to influence market sentiment positively. Economists anticipate around 170,000 jobs to be added. A too strong report could be a setback for stocks, aligning with expectations of rate cuts in H2 2024. Conversely, if the report aligns with or falls slightly short of expectations, it may reinforce beliefs in an imminent rate cut, potentially sparking a rally. On the other hand, a significantly weaker reading could renew concerns about a looming recession, impacting equities with rich valuations that may undergo de-rating as long-term growth expectations are reassessed.

Hence, the fine line where the NFP report must land is not an especially ideal risk-reward setup, even for super forecasters. Indeed, picking the right door to walk through in January, bull, bear or neutral, feels like one is on the famous American game show Let’s Make a Deal.

The disconnect between December’s positive sentiment in financial markets, particularly the anticipation of rate cuts, and the actual labour market indicators is the misalignment that has so far contributed to the early-year stock market sell-off as investors now fret over potentially significant upside or downside misses on the U.S. jobs report.

Oil markets

Despite concerns over rising tensions in the Middle East, oil prices fell as the U.S. Energy Information Administration's inventory report revealed a significant spike in U.S. gasoline and distillate fuel supplies. The report, released late in the busy morning session in the U.S., was overwhelmingly bearish for refined products, indicating outsized builds across all three product categories due to exceptional demand weakness. This development raises concerns about a potential disconnect between the market's Goldilocks narrative and actual gasoline demand, especially when considering gasoline demand as a forward indicator of economic activity.

Forex markets

The earthquake's impact in Japan has led to a significant focus on USDJPY, with the Yen experiencing a sharp weakening since yesterday's “Tokyo Open.” Market sentiment suggests that the earthquake's impact is more substantial than initially thought. As a result, the market anticipates that the Bank of Japan (BOJ) is unlikely to make any rate changes for at least 3-6 months. This perspective is rooted in the belief that moving away from a negative interest rate policy while simultaneously flooding the economy with cash as a form of damage control could be counterproductive to shore up consumer and market sentiments.

Otherwise, Forex markets have been relatively uneventful as traders jockey for position ahead of the key U.S. jobs reports.