Market turnaround as investors await key economic data

What a difference a day makes. Last week, the S&P 500 ended its 9-week winning streak and sunk along with risk sentiment and the dollar rallied At the start of the new week, with more people back at their desks after an extended new year break, market liquidity seems back to normal, and with it risk sentiment is firmly back on the menu. After an inauspicious start in Asia, market sentiment soon turned around. European stocks are a sea of green on Monday, dragged higher by a strong day for tech stocks in the US. The Nasdaq had its best daily performance since November, as Apple, Amazon and Nvidia had a stunning day. The Nasdaq is higher by more than 2%, while Nvidia jumped by more than 5% to a fresh record high, signalling that the AI theme can still power US stocks markets and is not dead yet.

Some scepticism had crept into the market that companies will find it hard to monetise AI, however, as we approach earnings season, those fears have been put to bed. Whatever worries the market had last week about AI have gone, which has fuelled more of an ‘everything rally’ at the start of the new week. There are some notable exceptions. Boeing is down nearly 9%, as the market prices in the news at the weekend that a part of the fuselage blew off mid-flight for a Boeing 737 Max 9 plane. Boeing is extremely lucky that a larger disaster was averted, however, it will raise questions about whether there is a problem with Boeing’s engineering, and if this was a design fault. Investigations are ongoing, and we expect Boeing’s share price could come under even more downward pressure if a design fault is discovered. If this incident is discovered to not be Boeing’s fault, then we would expect the share price to rise, but it could be some time before this can be ruled out. Airbus, Boeing’s European rival, is capitalising on its woes, and is up more than 2% so far on Monday.

Airlines that use Boeing planes are also seeing stock market weakness on Monday, along with some of Boeing’s suppliers, for example, Alaska airlines is down more than 4% and American Airlines could also suffer some weakness after it said that it had also found lose bolts on some of its Boeing Max 9 jets. For now, Boeing is weighing on the performance of the Dow Jones, which is up by more than 0.5% today, but is lagging other US indices. Even the Russell 2000, which is an index of smaller US companies is higher by nearly 2% at the start of the week, a sign that the ‘everything bar Boeing’ rally that we have seen at the start of this week could have legs.

Saudi cuts weigh on the oil price, but help risk sentiment to return.

Elsewhere, the oil price fell sharply on Monday and Brent crude was down by more than $2 per barrel. The driver was Saudi Arabia, who announced cuts to the price of its oil deliveries for February, for all customers, not just customers based in Asia, as it has done previously.

The cuts to the price of oil are up to $2 per barrel in some cases, and this is driving the price of Brent crude back to levels last seen in mid-December. Brent crude is currently below $75.50. Two weeks ago, the oil price was above $80 per barrel due to fears about oil supply and the safety of oil tankers as they travel through the Red Sea. These concerns have not disappeared, and tensions in the Middle East remain. However, the price of oil has not responded with a spike higher. There are a few reasons for this in our view.

1, Supply

Monday’s move from Saudi Arabia is a reaction to supply factors. If they want customers to purchase their oil then they have to lower their prices. There is a lot of oil in the market right now, and Saudi needs to remain competitive. Even though Optec has enacted supply cuts, some countries, particularly African Opec + members, have not adhered to the Saudi Restrictions. Added to this, the US is pumping oil at a record pace. The IEA reported that US oil production shattered 20mn barrels per day, which means that US is producing more oil per day than any other country in history, and this is boosting overall oil supply. There is also record production in Brazil and Guyana, along with surging Iranian flows that are expected to have lifted world output by 1.8mn barrels per day last year, with non-Opec oil also expected to drive global supply gains in 2024, according to the IEA. Thus, while Opec is still an important part of the oil market, it is facing existential twin threats from a move towards green energy and supply from non-Opec sources, which could keep a lid on oil prices, which makes $80 per barrel oil look like a distant memory.

2, Oil demand:

Demand for oil is expected to have grown by 2.3mn barrels per day in 2023, however, demand growth is set to half in 2024 to 1.1mn barrels per day according to the IEA, as global growth slows. Oil demand from Europe has already been revised lower for last quarter, and China’s economy remains in the doldrums, which is also limiting the upside for the oil price.

3, The Middle East conflict

The oil market has not been rattled by the tensions in the Middle East, and previous wars between Israel and Hamas have not led to the oil price rising significantly. Thus, even if there is an escalation in the conflict in the coming months, which it appears there will not be, as long as it remains contained, then it should not put upward pressure on the oil price. Added to this, the market has not panicked at the prospect of violence against cargo ships on the Red Sea, largely because of the increase in oil supply as noted above.

The decline in the oil price has weighed on some key FTSE 100 members, including Shell and BP, which are both lower by 1.8% and 1.5% respectively, at the start of the week. The bigger question for markets and the decline in the oil price is the impact on inflation and the global economy. A lower oil price is disinflationary and positive for global growth at the same time, so maybe the soft-landing theory for the global economy is still possible.

FX view

In the FX space, the dollar fell on Monday, and the dollar index was slightly lower after the greenback experienced losses across the board. USD/JPY was down by 0.3%, while the South African rand made a comeback and was the top major currency performer on the day. The dollar was also weaker against a number of EM currencies, most notably the Rand, the Peruvian Sol, the Polish Zloty and the Mexican Peso. The prospect of March rate cut is not dead yet, as we await key US inflation data later this week. The market is expecting core prices to fall from 4% to 3.8% last month. While the stronger than expected US payrolls number shocked the market and caused the dollar to rally late on Friday, there was a silver lining for the dollar bears: the December ISM services employment index fell to its lowest level since the height of the pandemic in 2020, suggesting that there could be weakness ahead for the US labour market, thus keeping the door open for near term rate cuts from the Federal Reserve. This is fuelling risk sentiment, and also weighing on the dollar as we start a new week.