More weakness emerges in 2024, but will the tide change?

Market moves so far in 2024 suggest that the “everything rally” that we saw in the final weeks of 2023 has been firmly put to bed. The 9 -week winning streak for the S&P 500 came to an end last week, the 10 -year US Treasury yield is back above 4% and the dollar is also higher across the board, but particularly against the yen and the Aussie dollar. In fairness, a 9-week winning streak in the S&P 500 is a rare event historically, so it is no wonder that it came to an end. US stock market futures are also suggesting a lower open later today, and weakness in Asian stock indices overnight could also make it hard for European stocks to break the mould and move higher.

Chinese share weakness extends.

The news from China overnight has not been conducive to risk sentiment, which remains shaky on the back of the stronger December US payrolls report on Friday. Weakness in Chinese stocks has dragged down Asian indices at the start of the week. The Hang Seng is down by more than 2% on Monday as China’s tech sector comes under pressure. The tech sector is down 8% so far this year, after plunging 3% on Monday, while the Shanghai composite is also lower by more than 1.3%. The driver in Asian stock market weakness is two-fold, firstly concerns about the tech sector, and also concerns about another trade war brewing with the West.

China’s tech sector in focus

China’s tech sector is coming under pressure as a final decision on regulation for the gaming industry is looming, after Beijing announced new rules late last year to reduce spending on online video games. There is hope that these rules will be less severe than originally thought. Even so, investors are nervous as they await the final decision, because of Beijing’s history of interference in China’s tech sector. Once the decision is announced, it is worth watching the Nasdaq Golden Dragon Index, which measures the performance of Chinese companies listed in the US but that do the majority of their business in mainland China. This index is lower by more than 3% so far this year, and its short-term performance will likely be guided by Beijing’s decision on the gaming sector. 

China’s payback on Taiwan could hurt BAE Systems, but only temporarily

China has also slapped more sanctions on five US defence firms at the weekend, due to arms deals with Taiwan. This could have an impact on the share price of BAE Systems, the UK defence firm, which had seen its share price defy the recent gloom and rally to a new high at the start of the year. Any pullback in BAE could be temporary, as wars around the globe keep defence firms in focus.

Elsewhere, US stock market futures failed to be buoyed by news that the US Congress had reached a spending deal that makes a government shutdown less likely on January 20^th. Annual spending this year in the US will be capped at $1.59 trillion. Although averting a government shutdown is a good thing, the US economy has been buoyed by President Biden’s fiscal largesse, so attempts to curb this could be given the cold shoulder by investors in the short term.

The market is still expecting the Fed to ride to the rescue

Overall, these market moves suggest a whiff of risk aversion is in the air, especially after stronger than expected US Non Farm Payrolls data on Friday. This has caused investors to question the prospect of an early rate cut from the Fed. The CME Fedwatch tool is now predicting a 61% chance of a 25bp rate cut from the Fed in March, down from a 73% chance one week ago. This is a fairly mild scaling back of expectations for an early rate cut, and although US bond yields have moved higher in recent days, the move has not been disorderly, and is more of a slow climb higher. This suggests to us, that the pullback in stocks and risk sentiment could be temporary, and that investors still think that the Fed will ride to the rescue and that the current market sell off will be temporary. Due to this, we believe that Fed speakers will be important to market sentiment in the coming weeks. We will be listening out for the four Fed speakers this week, including the dovish Atlanta Fed President Raphael Bostic, who is a voting member of the FOMC this year and who is speaking about the outlook for the US economy later this evening.

UK retail updates: how healthy is the UK consumer?

There is a dearth of economic data at the start of this week aside from the Eurozone, where November retail sales and a collection of confidence data for December will be worth a watch. However, the key events come later this week when US CPI is released on Thursday, there are also trading updates from M&S, Tesco, Sainsbury’s, Greggs, Persimmon, Taylor Wimpey, and Whitbread all happening later this week. Thus, a quiet Monday could unleash a wave of critical sales and spending data from the UK which will tell us about the health of the UK consumer and could have a large bearing on UK stock markets for the rest of the month.

So far, the news from British retailers has been mixed. There was good news from Next, after it reported a 5.7% increase in full price sales in the 9-weeks to December 30^th, this was significantly higher than the 2% guidance it gave earlier in the year. This news was just the tonic for investors, and it caused the Next share price to rocket to a fresh record high at the end of last week, bucking the trend for stock market weakness. Interestingly, it said that both its bricks and mortar and online business had done well, and it boosted its full year profit guidance by £20mn to £905mn for 2023, up 4% on 2022.

This good news was not replicated by JD Sports, which issued a profit warning last week, and saw its share price fall to its lowest level in more than a year, wiping £1.8bn from its share price, as heavy discounting, especially on expensive Nike Tech fleeces, and bad weather hit the sports retailer.