Financial Markets’ Weekly Recap, January 8-12

The earnings season kicked off with a slow start, with the KBW Bank stock index experiencing a 3.1% decline and the 10-year Treasury yield dropping from 4.1% to 3.9%. The Magnificent 7 led the rally with a 4.3% gain, while the equal-weighted S&P 500 saw a 0.3% increase.

Investors were looking forward to better times when the Fed cuts short-term interest rates, as seen by the dominance of bank and financial earnings at the end of the first week of earnings season.

Nominal GDP growth and sales growth are closely correlated, and the combined earnings performance ultimately fell short of forecasts. It is worth noting that US lawmakers are preparing a temporary bill to keep the government’s doors open until March as the nation faces a partial shutdown this week.

Airbus Versus Boeing

Airbus SE has recently soared to an all-time high of €145, following an 8% decline in shares. Meanwhile, Boeing faces safety concerns due to the Federal Aviation Administration’s grounding of 171 737-MAX 9 planes following an Alaska Airlines flight. The grounding is reminiscent of a similar crisis four years ago, involving two fatal crashes. Bank of America has issued a cautionary note, warning that continued troubles could undermine public trust in the 737 MAX and potentially hurt sales.

US Dollar’s performance amid key inflation data

The US dollar finished the trading week flat, with expectations that the Fed could lower rates six times this year for a total of 150 basis points, continuing to hurt the value of the dollar. The problems in the Red Sea and surrounding region are drawing little bid for the dollar, making it challenging for the dollar to make significant moves in any direction.

The US Producer Price Index (PPI) for final demand rose by 1% in December, slightly below market expectations of 1.3%. The annual core PPI increased by 1.8% in December, falling below both the November reading and analysts’ estimates of 2% and 1.9%, respectively. US bond yields are declining, with the 2-year yield at 4.13%, the lowest since May 2023, while the 5-year yield is at 3.83% and the 10-year yield at 3.94%. Technical analysis shows that buyers hold their ground, with indicators still in positive territory.

Cryptocurrencies

After a week of conflicting signals and phoney tweets, the SEC eventually approved eleven spot Bitcoin ETFs in the cryptocurrency industry. Before the market sank on Thursday, Bitcoin was trading just below $49k. As a result, BTC/USD was only trading slightly below $43k. Even after the sell-off, Bitcoin still has a promising future.

Volatility

The euro’s lack of volatility suggests potential range trading, with EU inflation and sentiment data unlikely to significantly impact the market. Gold’s appeal is boosted by increasing tensions in Yemen, and short-dated US Treasury yields are falling further.

The Sterling’s uncertain landscape is exacerbated by recent bullish price action and unimpressive GDP figures. US equities are pushing against multi-year highs despite growing geopolitical risk, with the coordinated US/UK action against Houthi rebels in Yemen potentially provoking reprisals. The US earnings season began on Friday, and the Nikkei 225 continues to print new multi-decade highs in Asia.

Oil benefited from geopolitical tensions

Financial markets are pricing in risk premiums to the price of oil after US and UK forces struck Houthi rebel targets in Yemen overnight. The Middle East is crucial for global oil supply, with major producers including Saudi Arabia, Iraq, and UAE relying on vulnerable transportation routes, including the strategic Bab el-Mandeb Strait next to Yemen. Around 4.8 million barrels of crude oil and refined products flow through this narrow passage each day.

Oil also benefited from a marginally lower US dollar after the yield on the rate-sensitive UST2-year fell yesterday, in part on increased haven demand. A weaker dollar makes oil less expensive for foreign buyers, increasing demand and pushing prices higher. US crude is currently stuck between two Fibonacci retracement levels, the 61.8% level at $75.64/bbl. and the 78.6% level at $70.36/bbl.