The Macro
It was a very busy week for economic news, with a slew of data from the US, UK, Eurozone and China dominating the headlines.
Here’s the key takeaways:
- US growth was way ahead of expectations - annualised GDP growth came in at 3.3% in Q4 vs an estimate of 2%. This follows the blockbuster 4.9% rate recorded in Q3.
- ECB held interest rates - on Thursday, the European Central Bank kept interest rates unchanged at 4.5% and 4% for the refinancing and deposit facilities rates respectively. Christine Lagarde, head of the ECB said officials agreed it was too early be discussing interest rate cuts.
- BoJ held firm on interest rates and cut inflation projections - the Bank of Japan kept its short-term interest rate at -0.1% and its 10-year bond yields at around 0% in its January meeting. They also cut their CPI readings for 2024 to 2.4% from October's 2.8% projection, reflecting the recent decline in oil prices.
- PBoC maintained lending rates and boosted bank liquidity - the People's Bank of China (PBoC) maintained lending rates, as it continued its attempt to support an economic revival. The one-year loan prime rate remained at 3.45% for its fifth month, with the five-year held at 4.2% for its seventh. PBoC officials also announced a cut to reserve requirement ratios for banks in early February of 0.5%. This will provide 1 trillion yuan ($139 billion) in long-term liquidity to the market.
- UK manufacturing and services show promising signs, but production is lagging - the UK Composite PMI rose to 52.5 in January 2024, up from 52.1 in December. The strongest rate of output growth since June. The services PMI rose to 53.8 in January from 53.4 in December. Meanwhile, the manufacturing PMI rose to a 9-month high of 47.3 in January 2024 (still in contractionary territory). However, production decreased the most in three months, with weak order books and overstocked customers to blame.
The Markets
It was a risk on week in markets as optimism surrounding positive economic data came through. It was also an important week for earnings, with many big names beating earnings expectations and providing positive outlooks. There were a few disappointments, however.
The S&P 500 hit three consecutive record high closes in the week with Microsoft and Netflix driving the index higher. Microsoft became the second-ever company to exceed a $3tn valuation on Wednesday, after its focus on artificial intelligence (AI) continued to drive an investor rally. Netflix rose following news that it had signed up 13.1m customers in Q4, the best quarter of growth since the early days of the pandemic, also following changes to rules on password sharing. Tesla’s shares fell after narrowly missing earnings estimates and warning that its expansion will be notably lower in 2024.
In Europe, AMSL saw orders triple from Q3 to Q4 as demand for its semiconductor manufacturing equipment soared.
Chinese shares saw a reprieve during the week following their punishing $6tn decline. This was due to positive indications that Chinese officials are seeking to mobilise around 2 trillion yuan ($278 billion) from accounts of Chinese state-owned enterprises to buy shares to help stabilise markets, boosting both domestic and Hong Kong listed shares.
| | Weekly Change | YtD Change |
|---|---|---|
| FTSE 100 | 0.91% | -2.48% |
| FTSE 250 | 1.87% | -1.48% |
| S&P 500 | 2.98% | 2.61% |
| NASDAQ | 1.30% | 3.33% |
| Hang Seng | 5.90% | -4.90% |
| Nikkei 225 | 0.76% | 8.28% |
| Brent Crude | 2.60% | 6.30% |
| Gold Spot | -0.71% | -2.19% |
| UK 10yr Gilt Yield | +7bps | +45bps |
| US 10yr Treasury Yield | -1bp | +15bps |
Chart of the week
Source: @AnilVohra1962
The pink line in the chart above shows Chinese stock performance relative to the S&P 500 (the black, normalised line).
The key takeaway? Chinese stocks are now at a 30-year low relative to US stocks.
Why’s that important? Chinese stocks are cheap (vs US expensive), China is cutting interest rates, China’s economy is in recession (vs US late cycle expansion). These things go in cycles, and eventually the tide will turn here, but of course there’s sentiment and political obstacles as well.
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