Dollar slips

European and US stocks followed Asian peers higher on Monday, with the notable exception of the FTSE 100, where NatWest shaved around 44 points off the index. That said, mining companies posted strong gains: Antofagasta rallied more than 6%, while Fresnillo and Endeavour added between 5% and 6% each, on a rebound in metal prices that sent gold past the $5’000 mark and silver to $84 per ounce. Both metals are trading lower this morning, despite a US dollar that remains under pressure.

Elsewhere in Europe, a 9% jump in STMicroelectronics stood out after news that Amazon’s cloud-computing arm is deepening its ties with the chipmaker to secure semiconductor technologies for its data centres. As I often say, for those with the patience — and the nerves — European technology stocks that can team up with US peers and ride the AI wave can pop on deals like this. And there should be more of this type of news ahead, as Europe also migrates towards AI-driven applications — eh oui — which will require the involvement of local technology players.

In the US, Nasdaq futures fluctuated between gains and losses into the open, but the bulls ultimately gained the upper hand, allowing the Nasdaq 100 to push above the 25,000 mark. Big Tech led the gains. In the absence of major headlines, however, the move did not mark a fresh direction but rather a correction following last week’s heavy selloff. Google’s announcement of a $20bn bond sale to finance additional spending — including a rare, pound-denominated 100-year bond — raised a few eyebrows. The index nevertheless closed above its 100-day moving average, also supported by a cheaper US dollar.

On the earnings front, roughly 60% of S&P500 companies, including most of the Magnificent Seven, have now reported. Around three-quarters of these companies — and almost all of the Mag 7, except Tesla — delivered positive earnings and revenue surprises. Nvidia has yet to report.

Overall, S&P 500 companies have posted earnings growth of around 13% so far. If this pace holds through the remainder of the season, it would mark the fifth consecutive quarter of double-digit earnings growth for the index. That alone deserves applause.

But there’s a catch.

A meaningful share of this strength can be attributed to Big Tech — and to a weaker US dollar. FactSet, for example, compared companies with higher international exposure to those that are more domestically focused. They split the S&P 500 into two groups: companies generating more than 50% of sales inside the US, and those generating more than 50% outside the US, using actual results where available and estimates for the rest. They found a clear divergence in Q4 performance.

Companies with predominantly domestic revenue exposure recorded blended earnings growth of around 10%. Those with greater international exposure posted 17.7% growth — meaning earnings grew roughly 77% faster for globally exposed firms, helped by dollar weakness.

Unsurprisingly, many of those companies are familiar names: Apple, Meta and other tech heavyweights with large overseas footprints.

So the verdict is clear: tech lifted earnings, and the weaker dollar amplified them.

And yet, investors appear to be losing patience with their Big Tech darlings — Microsoft, Google, Amazon and Meta — despite their strong results. At the very least, the knee-jerk reaction to fresh spending plans has made investors more uncomfortable than they already were going into earnings season. After three years of an breathless rally that pushed technology valuations to flashing levels, there is a slight smell of something burnt. Investors are no longer convinced there is much juice left to squeeze.

Meanwhile, value stocks have started to close the gap with tech — the widely anticipated rotation trade. The S&P 500 equal-weight index is narrowing the gap with the traditional, technology-heavy version. This has been the base-case scenario for many global investors and is expected to continue.

Still, I can’t help but wonder: if tech really falls out of favour, can non-tech sectors — the beneficiaries of the rotation trade — carry the market to fresh highs on their own?

Time will tell. According to recent Goldman Sachs data, short selling across single stocks last week hit a record high based on data collected since 2016. At the index level, short positions against the S&P 500 have also risen over the past three weeks, though they remain well below the December peak.

More broadly, the stress seen in technology and metals over the past two weeks — and the US 2-year yield trading near its lowest level in almost three and a half years — reflects expectations that the Fed will remain accommodative to support a weakening US jobs market, if inflation allows. That could help, but the question is: to what extent?

In FX, the dollar’s weakness was striking. The EURUSD surged from 1.18 to 1.1926 as traders positioned for a growing divergence between the Federal Reserve (Fed) and the European Central Bank (ECB). Cable jumped by a full figure despite the political turmoil surrounding Keir Starmer’s government. The USDJPY plunged below its 50-day moving average and extended losses today, despite a landslide victory for Takaichi — which could, in theory, have weighed on the yen. Some of the move can be attributed to relief and optimism around political certainty, but most of it was clearly driven by broad-based US dollar weakness.

So, the US dollar kicked off the week on the back foot, and upcoming US data from today through Friday will determine whether the pressure continues or whether the greenback finds some relief.

US retail sales today are expected to show slowing growth in December — not great news for the most festive month of the year. On Wednesday, the official jobs report is expected to come in soft, with around 70k non-farm job additions, a steady unemployment rate and slower wage growth at 3.6%. On Friday, CPI is seen easing to 2.5% from 2.7% previously. If soft labour data is combined with cooling inflation, US yields and the dollar could remain under pressure — supporting gold, other metals, Bitcoin and equities, particularly small-, mid-cap and value stocks. Indeed, the US mid-cap index hit a fresh record high yesterday, while the small-cap Russell 2000 is within touching distance of a record of its own.