Markets extends rally on expectations of a cooler US inflation

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

The Dow added more than 250 points on Wednesday, while the S&P 500 gained 1.3% and the Nasdaq 100 market its 4-day winning streak since September, advancing 1.8%.  Confidence rose among investors betting on today’s inflation report which is expected to show cooling signals and a downshift in the Fed’s rate hike.  Globally, hopes grew that China’s reopening would boost growth prospects for the country and other economies.  European equity markets were also higher yesterday, with the benchmark Euro Stoxx 50 up 1.0%, led by gains in retail shares with sentiment supported by optimism over China’s reopening and as investors digested a batch of corporate news. 

Summary as at 12.01.2023 

• Asian equity markets mostly rose on Thursday although gains were somewhat capped.    Investors reacted to China’s inflation data which matched forecasts in December, as well as Australia’s trade surplus and Japan’s current account surplus that exceeded expectations.  
• European equity markets are set to advance this morning as US equity futures were also steady on hopes for a cooler US inflation data that could prompt the Fed to slow its tightening cycle. 

• Oil prices were steady this morning after rising for five straight sessions, underpinned by an improving demand outlook in China following the end of the country’s zero-Covid policy.  Concerns about the impact of sanctions on Russian supply also supported oil prices, as European Union curbs aimed at Russian fuel product sales are set to take effect in February. 
• China’s annual inflation rate rose to 1.8% in December from November’s eight-month low of 1.6%, in line with market consensus.  The latest result largely reflected a faster rise in food prices, even as domestic demand was sluggish amid a spike in Covid infections.  For the full year of 2022, inflation was up 2.0%, below the government target of around 3%.  Core consumer prices, rose 0.7% yoy in December, after a 0.6% gain in November. 
• The US airline industry was in focus yesterday after the Federal Aviation Administration (FAA) temporarily paused all flights across the US after experiencing a computer outage impacting key pilot notification systems.  The White House said there was no evidence the outage was due to a cyberattack, but it has ordered the Department of Transportation to do a full investigation.  
• Taiwan Semiconductor Manufacturing Company Limited this morning posted a 78% rise in fourth-quarter net profit, as strong sales of advanced chips helped it defy a broader industry downturn that battered cheaper commodity chips. 
• Wells Fargo & Company announced a strategic change to its business which will include a reduction in the size of its mortgage lending business aimed at creating a more focused home lending business, particularly on serving bank customers, as well as individuals and families in minority communities. 

• Bed Bath & Beyond shares posted a record one day, up more than 68%, on speculation that the company could be a potential acquisition target.  Shares rose a further 19% in after-hours trading.  Earlier the company announced plans to cut headcount as part of a drive to cut costs after it reported a wider fiscal Q3 loss. 
• Bernard Arnault, the Chairman and CEO of LVMH has appointed his daughter Delphine to lead Christian Dior, in a shakeup of top management that tightens the family grip on his empire.  Arnault, recently overtook Elon Musk as the world’s richest person.