Today’s market analysis on behalf of Michael Brown Senior Research Strategist at Pepperstone
DIGEST – Stocks gained yesterday, while precious metals and Govvies joined in with an ‘everything rally’ as participants looked through geopolitical events. Today, services PMIs highlight the calendar.
WHERE WE STAND – A penny for the thoughts of ‘big’ Sam Allardyce this morning, who must be weighing up whether he fancies the Man Utd manager job, or would rather have a turn as interim Venezuelan president.
I jest, of course, although that’s far from the worst geopolitical view that I’ve seen over the last few days. Clearly, the bull market in bad takes is still firing on all cylinders as the new year gets underway.
Fresh developments were relatively thin on the ground yesterday, though that in itself is probably the most significant takeaway, in that the situation in Venezuela does not appear to be escalating for the time being.
Meanwhile, though plenty of column inches continue to be taken up by talk of a sudden surge in oil output, it’s important to note that the country’s energy infrastructure is in a dire state, that tens of billions of investment will be needed to get things back up and running and that, in any case, the extra-heavy sour nature of Venezuelan crude mean the economics of extraction don’t really add up with Brent at $60bbl. Furthermore, refurbishing the infrastructure in question will take years, if not longer, meaning that any potential output increase is a story for a much later date, and that nothing we’ve seen so far materially shifts the outlook for crude.
As for other matters, it proved to be a pretty risk-on start to the trading year yesterday, with ‘green on the screen’ across the board as far as global equities were concerned. In fact, almost everything that we saw during the day was in line with the year-ahead views I outlined yesterday – can we just call 2026 ‘done & dusted’ now?!
Again, I’m not being entirely serious there, but it was notable the ease with which stocks on both sides of the pond shrugged off geopolitical noise, as participants remained squarely focused on what remains a robust bull case of resilient economic growth and robust earnings growth, largely in keeping with that which powered the market higher last year, aided along by expectations for considerably looser monetary and fiscal backdrops through the next twelve months. My view remains that the ‘path of least resistance’ continues to lead to the upside, and that any dips – were the to occur – continue to represent buying opportunities.
That said, I did run the numbers yesterday on the S&P’s average annual performance in a midterm election year which, since the turn of the century, is a pretty meagre +1.45% gain. As most will know, I’d not place especially much weight on seasonality alone, but it’s at least something worth bearing in mind, even if my own view is that something of a ‘Trump Put’ into those very midterms should actually underpin risk assets, rather than act as a headwind.
Elsewhere, precious metals continued to shine (sorry!), with gains seen across the complex as gold reclaimed the $4,400/oz mark, and silver rallied back above $78/oz. Interestingly, there remain signs of a physical silver shortage, with one-month lease rates at their highest since October, while the curve remains fairly heavily backwardated. That aside, I remain bullish on the complex at large, as reserve demand should underpin gold, and industrial demand should see XAG, XPT & XPD continue to advance.
Besides that, it proved a choppy start to the week in both the FX and FI complexes. The dollar gained early doors before demand fizzled out, allowing the EUR to reclaim $1.17, and cable to poke its head back above the $1.35 mark as the day wore on, though on the whole we remain in relatively tight ranges. I’d be a USD dip buyer here.
It was a similar ‘day of two halves’ for Treasuries, where early pressure gave way to gains led by the belly as trade progressed, albeit with the curve continuing to steepen. As noted yesterday, I find it tough to bet against a further steepening of the curve, not least as the 2% inflation target increasingly becomes a floor, rather than a ceiling.
LOOK AHEAD – A pretty light docket lies ahead, as focus remains largely on geopolitical developments.
Services PMIs are the main focus, with final December figures due from both the UK and eurozone, though we shan’t get the much more important US ISM survey until tomorrow afternoon. Meanwhile, last month’s ‘flash’ German inflation stats are also on the slate, ahead of the eurozone-wide release on Wednesday, with both of those prints set to reinforce the idea that the ECB’s easing cycle is now ‘done and dusted’.