Financial Markets Weekly Reap: Q4 Earnings, CPI In Focus

Wildfires Ignite Inflation Fears as Economic Headwinds Intensify

The recent wildfires in Los Angeles have ignited concerns beyond the immediate human and environmental toll. Economists warn that these infernos will not only scorch the land but also fan the flames of inflation, further complicating the Federal Reserve’s fight to bring prices under control. The economic impact could apparently include job losses and supply chain disruptions. Initial estimates from investment banks paint a grim picture, with an estimated $40 billion in losses projected to shave 0.2 percentage points off US GDP in the first quarter while concurrently slowing job growth.

Morgan Stanley anticipates a significant job loss in California, primarily within the service sector, potentially impacting between 20,000 and 40,000 workers. These job losses, coupled with disruptions to supply chains and increased costs for materials and labor, are expected to temporarily elevate core inflation. The impact on the automotive sector, particularly in terms of used and new car prices, is likely to be substantial.

Oil Prices Dip Amidst Easing Geopolitical Tensions:

Oil prices experienced a slight decline, driven by a convergence of factors. A potential ceasefire agreement in the Red Sea, aimed at halting Houthi attacks on shipping, has eased maritime security concerns and reduced geopolitical risk premiums. This development, coupled with a recent agreement between Israel and Hamas to end hostilities in Gaza, has contributed to a more stable regional outlook. Brent crude futures settled down 74 cents, or 0.9%, at $81.29 per barrel after rising 2.6% in the previous session to their highest price since July 26. US crude futures fell more than $2 at times during the North American session on Thursday.

Despite the positive news on the geopolitical front, investors remain vigilant. The Houthi militia has emphasized the need for strict adherence to the ceasefire agreement and has reiterated its readiness to resume attacks should any violations occur. Moreover, the impact of recent US sanctions on the Russian energy sector continues to reverberate, prompting Moscow to seek alternative markets for its oil exports. This has led to increased shipping costs and intensified competition for global oil supplies.

Wall Street Banks Flourish as Earnings Season Kicks Off

Strong Corporate Fundamentals Support Equity Markets: The strength of corporate fundamentals remains a key pillar of support for the equity market, as demonstrated by the robust start to the earnings season and strong results from major Wall Street banks. Robust earnings growth, fueled by revenue growth and cost control measures, has the potential to offset the dampening effect of higher yields on stock valuations. This resilience in corporate earnings provides a crucial counterbalance to the headwinds emanating from the bond market.

Q4 Surge in Bank Profits:

The fourth quarter of 2024 witnessed a surge in profitability for major Wall Street banks, driven by a confluence of favorable factors. Morgan Stanley, the bellwether of the industry, led the charge with a more than doubling of profits, fueled by a wave of dealmaking activity that reverberated across the sector. Investment banking was a key driver of this impressive performance, with merger and acquisition activity experiencing a significant uptick. This surge in dealmaking translated into substantial revenue gains for firms like Morgan Stanley, Goldman Sachs, and JPMorgan Chase.

Wall Street banks’ success extends beyond investment banking, with Morgan Stanley demonstrating the strength of its wealth management division, contributing significantly to overall revenue growth. Goldman Sachs and JPMorgan Chase reported strong fourth-quarter results, driven by robust investment banking fees. Bank of America exceeded expectations on both profit and revenue, while Wells Fargo provided strong guidance on net interest income for 2025. Citigroup also reported a significant increase in net income for the fourth quarter, driven by strength across its businesses, particularly in services, banking, US personal banking, and markets.

Citigroup’s ongoing business transformation initiatives, including consumer business exits and organizational simplification efforts, are expected to contribute to long-term profitability and efficiency. The strong performance of major Wall Street banks in the fourth quarter reflects a dynamic and robust market environment, with a surge in dealmaking activity, a favorable economic backdrop, and supportive interest rate policies.

European Shares Advance on Easing Bond Yields

European shares advanced on Friday, driven by broad-based gains across sectors as government bond yields continued to decline. The pan-European STOXX 600 rose 0.4%, positioning the index for a fourth consecutive weekly gain. The Euro capitalized on the US Dollar’s decline, which fell below the 109.00 mark on the US Dollar Index.

Key sector performances included the construction and materials sector, which rose 0.8%, followed by utilities with a 0.7% increase. The yield on Germany’s 10-year bund dropped for the third consecutive session to 2.494%, reflecting eased borrowing costs across the region. The UK’s FTSE 100 outperformed its European counterparts, gaining 0.8%. Mining stocks were among the top performers, with Glencore climbing 1.9% and Rio Tinto’s London-listed shares rising 1.2%. With bond yields easing and expectations for supportive central bank policies growing, European markets appear poised for continued strength.


China’s Economy Shows Resilience Amidst Global Challenges

China’s economy experienced a 5.4% growth in Q4 2024, surpassing market expectations of 5%. The government has implemented measures to revitalize local manufacturing, address state government debt, and strengthen the property sector. Beijing is gearing up for another year of fiscal measures in 2025, including increased debt issuance and a larger GDP deficit to counter economic challenges. However, a Reuters poll projects that China’s GDP growth could slow to 4.5% in 2025 due to heightened trade headwinds and other macroeconomic pressures.

In 2025, Beijing is poised to implement a more active fiscal policy to address growing economic headwinds. This likely includes increased government borrowing and a higher budget deficit. A key factor driving these measures is the looming escalation of trade tensions with the U.S. President-elect Trump’s promise to immediately impose significant tariffs on Chinese goods upon taking office for his second term is a major concern. This aggressive trade stance is anticipated to trigger retaliatory measures from China, further intensifying the need for proactive domestic economic support.

Deflation continues to weigh on China’s economy, highlighting the need for policies to boost private consumption. Persistent price declines have curbed household spending and posed a challenge to sustained economic growth. As China navigates domestic economic reform and escalating external risks, its policy decisions will play a critical role in shaping its economic recovery trajectory.

The US economy’s robust job market has contributed to inflationary concerns and increased market expectations for the Federal Reserve to maintain a restrictive monetary policy stance. The recent jobs report shows moderate wage growth, but the continued strength of the labor market raises the possibility of persistent inflationary pressures. Bond yields have risen sharply, and the dollar has strengthened against major currencies.

In the Eurozone, inflation accelerated in December, driven largely by a rebound in energy prices. The European Central Bank faces the challenge of balancing the need to support economic growth with the need to contain inflationary pressures.

German Chancellor Scholz Outlines Economic Revival Plan

Chancellor Olaf Scholz presented his vision to rejuvenate Germany’s struggling economy during a campaign event at Volkswagen’s historic home base, Wolfsburg. He defended his government’s economic record, which has been battered by an energy crisis, high inflation, and a manufacturing slump. Scholz outlined plans to bolster the economy, including greater investments in green industries, more renewable energy generation, and a reduction of red tape. He also called for an overhaul of Germany’s debt brake, which limits government borrowing. Scholz faces an uphill battle for re-election, as his Social Democrats (SPD) are far behind in opinion polls, with around 16% support. Volkswagen is battling high manufacturing costs at home and rising competition in China.

After three months of bitter negotiations, management and unions struck a deal last month that will see 35,000 VW jobs cut by 2030. Scholz insisted that his government had rescued jobs at the carmaker while calling to keep “moving forward” with ramping up production of electric vehicles.

Gold Prices Surge on Uncertainty and Inflationary Fears

Gold prices have surged above the $2,700 mark on Thursday, driven by investor uncertainty over US interest rate policy. The greenback declined as US core CPI came in below consensus at 0.2% MoM for December.

The USD index fell 0.2% with profit-taking emerging after the recent rally to two-year highs. The euro was the main underperformer, failing to break above 1.0320 resistance and settling near 1.0295. The yen saw significant moves with USD/JPY dropping through 157.00 to 156.00 before steadying at 156.50.