Pre Monday Open: Battle of the titans

Markets

MXCN gained 3.3% in 2 trading days to start the Year of the Rabbit. A-shares resume trading this week. Early CNY data on mobility show signs of demand recovery: as of Jan 26, railways, highways, waterways, and civil aviation have delivered 700mn travellers, still 47% below the 2019 pre-Covid levels. 

As we move from just a “reopening trade” to an actual “ growth trade,” one should expect Chinese shares to move much higher and for A share to lead once the H shares move ages.

The Nasdaq appears headed for a double-digit monthly gain; Tesla rose more than 30%, which sums up US markets ahead of what some traders suspect might end up being the final Fed hike of the cycle.

At some point, the Fed will reluctantly accept market pricing as disadvantageous as it is to their endgame, with inflation still running a long way off above target.

Policymakers can only go back to the well so often before the hawkish message becomes wholly watered down. However, If markets aren't inclined to believe it, then all the worse for markets is if the Committee sticks to its guns and holds terminal through 2023, one way or another.

Battle of the titans

Though this week's packed economic calendar features several important data releases, Wednesday's FOMC meeting will undoubtedly dominate investor attention. 

With most market participants anticipating the FED to downsize the rate hikes to 25 bp, the critical question for the February meeting is what the FOMC will signal about further hikes this year. Specifically, how many rate hikes will be required to keep the economy on a below-potential growth path to ensure inflation is tamed needs to be clarified. The problem is it is easy to picture scenarios where the FOMC does either less or more.

But for stocks to rally further, the Fed may need to break new lower ground during post-op commentary by couching policy more in line with market pricing or hinting they are entering the pause and reassessing phase.

Since the FOMC last met in December, inflation has continued to slide, making a case for slowing the rate hikes to 25bp, possibly a done deal.

On the other side of the pond, the ECB is widely expected to strike a very different tone from other G10 central banks with a 50bp rate hike and steady guidance that there is more to come. 

And this hike will be delivered in a very different environment than in December when a hawkish policy path led to more mixed results for the Euro as sovereign spreads widened over fears of tightening into a slowdown. 

However, none of this should come as much of a surprise to markets, so the scope for EUR outperformance is still limited even if the ECB offers this divergent message.