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European stocks were flattish with slight positive bias in Wednesday as the main bourses traded either side of the flatline following a mixed day on Wall Street that saw growth and tech come under pressure and cyclicals rally on spiking bond yields. Playing catchup due to Monday’s bank holiday the FTSE 100 was the star performer as it rallied to a post-pandemic high at 7,520. This morning it’s hovering around the 7,500 area, slightly lagging peers which traded about +0.1% in the first hour of trade.

You’ve got this real split between the worries around Omicron and the spread of new variants potentially impacting the economy and the fact that rates are going up, inflation is high, and the economy is doing just fine. That left the market dinging around a bit sideways – with some genuine volatility – during Nov and into Dec before we got the Santa rally at the back end of last month. The market is taking up that usual seasonal strength with some vigour again in January. The bond market is discounting further Covid tantrums and backing a higher rate environment later in the year with all guns pointing to 2% for the US 10yr this year – always be careful of hanging your hat on that trade since everyone always says the 10yr will hit such-and-such by a certain point and it rarely plays ball. Yesterday it struck 1.71%, whilst the 2yr note hit its highest since March 2020, hitting growth stocks somewhat and lifting financials and energy. Anything tied to the cyclicality of the economy was bid. Ford leapt 11% as it opened orders for the new F-150 Lightning electric pickup.

Yesterday saw the S&P 500 flat, the Nasdaq decline and the Dow rally to a new record high – the old cyclical vs growth rotation as yields rose. The small cap Russell 2000 index also rallied 1%. Apple declined a touch after hitting the $3tn market cap figure, Tesla was down 4% with some giveback of the recent pump. Megacap tech was pretty overbought so this could be about baton-passing and deck-shuffling rotation that keeps the broad market above water. However, index weighting towards 5 or 6 megacap names in US tech means the rest have to work that bit harder so these rotations are not always straightforward and certainly rarely ‘clean’. Momentum took a bit of a pounding – ARKK down about 4% for the session, over 40% off its all-time high struck a year ago.

Rising US yields lifted the dollar to its best level against the Japanese yen in five years. After all the navel gazing about omicron during late Nov and Dec the market has kind of moved on – similar to the way the equity market has taken a leap forward. As fears about the virus ebb we can concentrate that bit more on monetary policy divergence – as noted last year it’s a time of multi-speed exits from emergency level monetary policy support which opens up some scope for genuine volatility in FX markets again. So, the market is betting the Fed will be getting on with hiking this year and leave the Japanese well behind. I tend to think the Fed underdelivers on its dots – flatter, fewer hikes than planned. But the US economy will be a bright spot this year and could result in tighter policy than even the Fed thinks (I am doubtful still about this, but willing to be proved wrong). The UK is probably in a closer situation to the US than most – open domestic economy, few restrictions, high inflation. So no surprise to see the pound mount a decent rally against the USD after being hugely oversold coming into the Christmas period. Those gains have started to ease with GBPUSD consolidating around the 1.35.5 area. MACD bullish crossover again proved itself a decent indicator.

GBPUSD Chart 05.01.2022

Today’s data sheet has the ADP employment numbers for the US as well as housing data on building permits, before the minutes from the last Fed meeting in December are released.

Elsewhere, oil prices rose, with Brent at $80 and WTI moving towards $78 as OPEC+ stuck with its planned production increase for February. The implication is that the cartel is confident demand is withstanding Omicron. API data showed a larger-than-expected draw of 6.4m barrels last week, with the benchmark EIA report due later today forecast to show a draw of 3.5m barrels. WTI futures holding at the 61.8% area just under $77.

Oil Chart 05.01.2022

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