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Stocks across the main European bourses are off to a strong start in February, building on some recovery yesterday and another blockbuster rally for US tech. The Lunar New Year keeps many Asian markets quiet but Australia rose. January wrapped up with a loss of 4% for the Stoxx 600 but the FTSE was higher for the month, an almost lone outlier after a very turbulent start to the year for global stock markets.

The FTSE 100 trades up about 1% this morning, with similar or better gains for the DAX, CAC and Stoxx 50. A dismal January for stocks was capped with a solid finish and perhaps signs of a capitulation moment. Recovery in tech lifting Scottish Mortgage and Just Eat Takeaway to the top of the FTSE, whilst AstraZeneca and Vodafone lead the decliners. Across the Stoxx 600, financials, tech and basic resources are the top performers this morning. UBS leads the way with a 6% pop on buybacks + new targets + better-than-expected profits.

Wall Street put in another big day of gains – the Nasdaq and Russell 2k both up +3%; the S&P 500 recovering its 200-day moving average with a rally of 1.9%. The Dow Jones added over 1.1% for the session to cap one of the most volatile months in recent memory. It was still the worst month for US stocks since March 2020 and the worst January since 2009. The Nasdaq composite ended January down almost 9% despite the gains yesterday and on Friday. Futures are flat this morning.

Beaten up speculative tech led the gains – ARKK and Tesla both +10%; Netflix rebounded 11% on an upgrade to buy from Citi and CEO Reed Hastings sinking $20m of his own money to buy stock. Outsize moves maybe reflecting month-end rebalancing…or the moment the market has decided that a lot of growth was just looking too cheap? FANG+ index rose almost 6%.

Flurry of analyst moves yesterday: NFLX got that upgrade to buy; Apple PT upgrade from GS to $161 from $142; Bernstein cut Twitter PT to $40 from $75, though the stock bounced 6% on the broader tech gains; Barclays gave a double upgrade to Beyond Meat on their view that restaurant partnerships will help earnings; and finally Goldman Sachs cut its PT on Robin Hood to $15 from $23. Incidentally it was Cathie Wood who saved HOOD on Friday from its 15% decline with a purchase of 2.5m shares for several of her ETFs…more doubling down.

There a lot of central bank action to contend with this week, starting with the Reserve Bank of Australia, which said it will end QE in February but stressed that this does not mean a rate hike is imminent. AUDUSD was a tad firmer as it bounced off the round number support at 0.70.

Lots of fresh Fed takes, e.g. from Berenberg: “We forecast the Fed to begin raising rates somewhat more aggressively than is currently expected. We note that even if the Fed raises rates 6 times this year to 1.5%-1.75% by yr end and 4 more times in 2023 to 2.5%-2.75%, this would still leave real rates negative.”

And this from Citi: “We are raising our base-case from four 25bp rate hikes in 2022 to five rate hikes in 2022 (Mar/May/Jun/Sep/Dec). Risks remain to more aggressive policy as depending on core inflation readings, the Committee may elect to hike at all seven remaining meetings.”

General feeling is more rate hikes not fewer, risks firmly skewed to a more hawkish Fed … but markets remember don’t necessarily think it’s all bad as inflation is a serious threat to earnings. Yes, higher rates depress multiples…but inflation depresses earnings …walking a fine line. Market baking in assumptions of a more hawkish Fed or has that already happened?

Looking ahead to the Bank of England we look to three (and a half) main scenarios:

Dovish: Refrains from hiking and gives no clear direction on the likely path of raising rates…warns about omicron, suggest inflation is peaking. Slightly less dovish: it could also refrain from hiking but signal it’s likely to move soon.

Central scenario: hikes by 25bps on solid growth prospects + inflation squeeze (energy worries in particular).

Hawkish: Hikes by 25bps + gives strong signal to raise rates again later in the year, perhaps before the end of Q2. A hawkish BoE could also give some more detail on quantitative tightening this year.

German inflation was higher than expected in January – month-on-month at +0.9% (+5.1% yoy) was higher than forecast and shows that pressures remain. Similar picture noted for Spain…hawks are circling at the ECB: does Lagarde (the owl) swivel her gaze away from the doves? The German 2yr bund yield rose to its highest level since March 2019. And French inflation: contained in today’s French manufacturing PMI was this nugget from IHS Markit’s Joe Hayes: “Output prices rose at an unprecedented and alarming rate in January. Without improvements on the supply-side, inflation at this level could certainly become entrenched.”

Germany’s manufacturing PMI showed growth momentum returning at the start of 2022, the headline reading rising to a 5-month high and job creation accelerating. A gift for the ECB: cost inflation slipped to a 9-month low…which gives Lagarde room to sit on her hands for longer. Overall a rather mixed set of readings from the Eurozone PMIs this morning … but whilst the supply crunch remains, there are pockets where it is easing.

Today’s data event is the US ISM manufacturing index – all eyes on the inflation component. Ahead of this, gold trades around $1,800 with the US 10yr at 1.77%. Bitcoin is higher around $38k on the broad tech gains yesterday. The US dollar is weaker for a second day after peaking on Friday.

GBPUSD breaking trend resistance, ready for further gains?

GBPUSD Chart 01.02.2022

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