Rotation, not capitulation: Markets face AI fears and a heavy data calendar

KBC Market Research Desk KBC Bank

Markets

AI valuation stress kicks in for the second time this quarter after industry giant Broadcom’s sales outlook failed to live up to (outsized) expectations. Earlier last week, Oracle got punished for delay in completing data centers. The high beta part of the market sold off with the S&P and Nasdaq losing 1.1% and 1.7% respectively. Both key indices failed to take out the October highs in the run-up to the correction lower on Friday, in what might be a further completion of a technical head-and-shoulders formation with necklines around 6550 and 22 000. Technical pictures in the small-cap Russell 2000 or industrial Dow Jones look different (both set new highs last week), suggesting that the equity move at least for now is buffered by some rotation rather than being a broad-based market sell-off.

The equity market set-up is something to take into account as we start a jam-packed week. German Chancellor Merz and Ukrainian President Zelenskyy meet today to continue peace talks. Zelenskyy yesterday said that he is ready to give up demands for NATO membership in exchange for security guarantees from the US and Europe. It’s a new tweak to the US peace proposal under discussion. There’s no breakthrough on the most thorniest issue today, territory concession. On Thursday, EU leaders also meet to decide on how to morph the frozen Russian assets at Euroclear into two year of financing for Ukraine. Focus turns to the eco data tomorrow with US November payrolls and October retail sales. Global PMI surveys (December) and UK labour market are due as well. For US payrolls we see asymmetric risks with (the front end) of the US yield curve reacting more strongly in case of data weakness compared to solid numbers. Markets were attentive to Fed Chair Powell’s suggestion that recent data overstated US labour market strength and were keen to respond to it (raising Q1 rate cut bets). For Europe, we see asymmetric risks (to PMI’s) as well but in the opposite direction. This creates space for EUR/USD to further explore the upper part of the sideways trading channel in place since summer. The YtD high (EUR/USD 1.1919) serves as key reference. ECB Schnabel opened to door for a rate hike last week (after a long pause) while more dovish ECB member shut the door to more rate cuts. This view should be backed by upward revisions to GDP forecasts at Thursday’s ECB gathering. Downward revisions to 2027 CPI forecasts might be ignored and downplayed as a technical issue related to the delay of the EU’s Emissions Trading System 2 (ETS2). For UK labour market data (and UK CPI numbers on Wednesday) we’re back in the US situation where markets will be keen to err on the dovish side of expectations. The Bank of England convenes on Thursday as well and is set to lower its policy rate from 4% to 3.75%. The EUR/GBP YtD high and reference stands at 0.8865.

News and views

The BoJ’s Quarterly Tankan survey shows a constructive picture on the state of the economy. The closely watched large manufacturers’ sentiment index improved from 14 to 15, the best level since end 2021. The index measuring sentiment on large non-manufacturing companies held at the same level as in Q3 (34), but still hovers near the strongest levels since the 1990’s. The outlook also improved at large manufacturers (15 from 12) and remained unchanged for large non-manufacturers. Large industry capex is expected to growth at 12.6% this fiscal year. Companies expect overall global prices rises to hold near a pace of 2% over a 5-y horizon. The data strengthen the view that the BoJ will continue its policy normalization cycle with a 25 bps rate hike on Friday. Bloomberg also suggests this morning a likely start to selling ETF’s from January on. This process is expected to develop in a very gradual way in order not to disturb markets and might take decades. (starting pace of JPY 330bn/year).

Friday’s government bond issuance plan for 2026 by Slovak debt agency Ardal, shows gross issuance to be around €10bn next year. Two new syndicated deals are part of the plans. The agency intends to issue a new bond line with fixed coupon and time to maturity from 12 to 20 years (expected in H1 2026) and a new bond line with fixed coupon and time to maturity of 10 years (expected in H2 of 2026). The total expected amount to be sold via syndicated sales is EUR 5bn, regardless of the number of transaction. Aside from the syndicated sales it also intends to issue two new retail bonds lines with maturities up to 5 years. Other bond lines (including foreign currency) can be opened based on debt management requirements and investor’s demand.

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KBC Market Research Desk

KBC Bank

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