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U.S. stocks slid on the first significant trading day of the new year, signalling a downbeat start to 2024 after a winning year that left the S&P 500 shy of a new record high. The recent rally in stocks stalled on Friday, following two months of gains that contributed to gangbuster performance in the key U.S. benchmarks. The S&P 500, in particular, notched its ninth consecutive weekly win, marking the longest streak since 2004, and is approaching its all-time closing high of 4,796.56.
Tech stocks declined after Barclays analysts downgraded their rating on Apple’s stock, expressing concerns about demand for new iPhones. This downgrade contributed to a 1.7% fall in Apple shares as tech stocks slid. Economic updates expected later in the week, mainly the December jobs report due on Friday, could further challenge the ongoing rally. Investors are closely watching the report for its potential to influence the Federal Reserve’s reaction function. The prevailing bets on fast and furious interest rate cuts in 2024 have been a critical factor buoying stocks in recent weeks.
Tech stocks, with their rich valuations, are susceptible to the slightest economic wobble or shift higher in yields, and it’s not like everyone was participating in this narrow market high driven by A.I. hype.
Unfortunately for Tech bulls, both 10-year yields are higher, and global economic data paints an even less favourable picture. While one might expect Treasury yields to fall in response to negative growth surprises, the opposite has happened since last week’s dismal 7-year US auction, suggesting that not only are rate-cut bets waning, but bond markets are starting to add back some term premium as Treasury supply concerns loom. Indeed, it is not the best setup for growth stocks to start the year.
In this narrowly focused rally, investors should be less concerned about whether the U.S. enters a recession or if inflation and interest rates deviate slightly from expectations. The critical consideration is the potential bursting of the Technology market cap bubble and its capacity to trigger a broader slump in the global market.
But of course, if a recession does hit, and by all accounts of the most recent round of global PMI data, productivity is not in a great spot; richly valued equities (like Mega Cap Tech) would experience a significant de-rating if long-term growth expectations continue to decline. While this risk is easily identifiable, as evident in the data, it is crucial to acknowledge that significant sell-offs are often triggered by risks that go unnoticed.
Suppose one aims to craft an out-of-consensus macroeconomic storyline for the United States in 2024; how about a hard landing, with a massive shot of deflation imported from China, turning the everything rally into the everything crash?
U.S. rates are lower because of the Fed, not the data; therefore, the focus remains on monitoring upcoming data. In this regard, a crucial reading on the labour market is imminent, as December’s payroll report is scheduled for release on Friday.
The fear is that markets may foretell any weakness in the data, especially around U.S. employment metrics, as a harbinger of a hard landing.
Oil markets
Geopolitical risk, often a key factor influencing oil prices recently, initially supported price action overnight. However, geopolitical risk is akin to “headline risk,” as the recent market activity demonstrates. Oil prices initially rose after Iranian state media reported that Tehran had deployed a warship to the Red Sea, but later fell when reality set in.
In a more symbolic move to annoy the U.S. and its Western allies rather than a strategic military escalation, Iran dispatched a 51-year-old frigate to monitor Red Sea shipping lanes. The situation reflects a pattern of Iranian propaganda that lacks sophistication, cunning, or polish.
While geopolitical headlines can temporarily support oil prices, the broader market context, including dismal economic data in China and Europe to start the year and diminishing optimism about U.S. rate cuts, exerted downward pressure during the busy New York session. Coupled with a strengthening U.S. dollar, it contributed to the negative trajectory of oil prices into the Asia session as traders remained on headline watch.
Forex market
The recent dovish adjustment in Fed rate cut expectations establishes a higher threshold for additional weakness in the U.S. dollar to start the year. To sustain expectations for the Fed to initiate rate cuts as early as March, market participants will likely require a weak U.S. Payroll print but, as importantly, the continued ebbing of U.S. inflation metrics.
The critical question for dollar bears is how the gap between market-based rate cut expectations and the Fed’s projections will be reconciled. ( 150bp vs 75 bp).
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