Dancing to unpredictable tunes

The year continues at full speed, with data, political, and geopolitical headlines — all very interesting and worrying.

Last week, we were talking about oil — in the context of the U.S.’s capture of Maduro in an overseas operation that raised questions about international law and sovereignty. Oil and oil stocks fluctuated throughout the week as the U.S. said it wants to rebuild the country’s aging infrastructure to pump that oil and sell it. Exxon Mobil said last Friday that Venezuela was investable, and Trump quickly responded that they would keep Exxon out of Venezuela because he didn’t like their response. So, as everywhere, U.S. government intervention will heavily influence winners and losers. If you want to understand why stocks move the way they do, Trump’s Social Truth feed might give you a better explanation than traditional data and earnings.

SPDR’s energy ETF hit a record high last week, retreated, and closed the week on a positive note. Crude oil tested the 50-day moving average (DMA) and opened the week above it, but bullish bets remain very timid. Net bullish positions are around 15-year lows. That’s because oil supply is ample thanks to record U.S. pumping and OPEC’s restoration strategy. It’s hard to see oil bulls clearing key resistance levels: $62.50 per barrel (200-DMA) and $64 per barrel (38.2% Fib retracement of the June–December rally). Price rallies are being seen as opportunities to strengthen short positions, targeting the $53–55pb range.

This week, Jerome Powell is on the front page of Bloomberg news as the DOJ has targeted him and the Fed over his congressional testimony on ongoing renovations of the Federal Reserve’s (Fed) headquarters. That came on Friday. Powell hit back, saying this has little to do with the renovations, and more to do with Trump being unhappy with the Fed’s rate-setting policies — specifically, that they are not cutting rates as aggressively as he would like. Powell highlighted that the key issue is whether the Fed can continue setting interest rates based on economic data and evidence, or whether monetary policy will be directed by political pressure.

I’m afraid we may be moving toward the second scenario. If the Fed becomes a political tool, with its chair replaced by a government puppet, that could further weaken appetite for the U.S. dollar and U.S. bonds.

For those still following traditional economic news, last Friday’s U.S. jobs data was mixed. The economy added 50’000 jobs in December — fewer than analysts expected — but the unemployment rate fell and average earnings growth accelerated. Overall, the jobs market is weakening moderately, and with inflation risks looming, the Fed may wait before cutting rates. The U.S. 2-year yield jumped to 3.54%, and the probability of a March rate cut fell to 30% from around 50% a week ago. Equity markets reacted positively: the small-cap index added 0.78%, and the Nasdaq 100 gained more than 1%.

Part of the support comes from the Fed injecting liquidity through its RMPs, and the U.S. government now suggesting to buy $200 billion in mortgage bonds to reduce housing costs. It’s not officially QE, but the mechanics resemble the Fed’s bond and MBS purchases under QE, which injected tens of billions into the system through government and MBS purchases. Regardless of who injects cash — the Fed or the government — the outcome is ample liquidity, which markets are loving. So there’s no reason to exit equities. In theory, these measures could further boost inflation pressures, and equities could help investors manage that risk.

Speaking of inflation, the U.S. inflation data will be a major highlight this week. The previous CPI report was questionable, with housing inflation held at 0% due to missing data, resulting in unusually low numbers. This week, fresh data is expected, with the headline figure seen stable near 2.7%. Higher-than-expected numbers would likely temper Fed rate-cut expectations, and analysts will scrutinize the methodology to see if it reflects reality.

Again, if the Fed can’t set policy based on economic data and inflation picks up, you want assets that temper inflation risks: gold, commodities, inflation-linked bonds, dividend-paying stocks, and tech.

Asian tech kicked off the year outperforming U.S. peers. TSMC revenues topped estimates last week, and the company will release earnings this week, highlighting continued AI-related revenue growth. The valuation gap between U.S. and Asian tech suggests further inflows toward the latter, which are supported by earnings growth expectations: EPS is expected to grow 79% in South Korea, 36% in Taiwan, and 28% for the Nasdaq, according to Bloomberg. The Korean Kospi started the new week at a fresh record high, while the Chinese Hang Seng is up 1.2% at the time of writing.