'First Five Days' Rule Points to a Challenging Year

Stocks

Summary:

US equity indices declined in the first five trading sessions of January. This dynamic promises a challenging year for the stock market, according to the old "first five days" rule.

Identifying a defining trend would have been an easy task if not for stabilisation on the day of the NFP release on January 5 and a strong rally on January 8.

The "first five days" rule was popularised by Jim O'Neil during his time working for investment banks. Don't limit yourself to this rule for the entire year, but consider it as a sentiment for the year.

The last time this method misfired was in 2018, but after that, it correctly determined five times whether the S&P500 would end the year up or down. The indicator also predicted a decline in 2016, but that was a year of growth after the prolonged stagnation of 2015 and an 11% plunge in January.

We now tend to agree with the "first five days" sentiment. The S&P500 index broke the highs of late last week and was only 0.8% away from an all-time high.

'First Five Days' Rule Points to a Challenging Year_1

The US stock market was near highs last week as markets strengthened on expectations of more aggressive rate cuts from the Fed. Currently, rate futures see a cut at every meeting since March as the main scenario. The driver has been weaker ISM services and producer price indices, but the usually weightier, stronger employment and consumer inflation data is ignored.

In addition, we are dismayed to see that the level of greed in the markets has bordered on extreme greed over the past month. Declines out of extreme greed often precede corrections and sometimes give rise to bear markets.

'First Five Days' Rule Points to a Challenging Year_2

It may well be that the bulls squeezed everything they could out of the last rally, including abundant short-squeezes from recession-expecting bears and extremely dovish expectations from the Fed for this year.

The coming year may prove to be as challenging and clear-cut as the first five trading sessions have been, but still more indicators point to a correction than a continued rally, at least in the coming weeks.

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ING

Forex

USD: Fed's Waller speech will be important for the dollar

European FX starts the day on the back foot. Asian equities are off on the back of further poor sentiment out of China. From what we can gather it seems that a new, specialised funding list for property developers announced by one of the Chinese banks has raised some doubts about a softening of credit conditions. USD/CNH has traded to 7.20 – the top of a two-month trading range – and a softer renminbi has taken Asian currencies with it. Events in the Middle East are also being cautiously monitored, although it is important to say that energy markets remain quite orderly, and European natural gas has actually dropped below EUR30/Mwh, a very welcome development for European industry.

Onto the day ahead, what catches our eye is a 5:00 pm CET speech from the Federal Reserve's Christopher Waller. Recall that he delivered the definitive and market-moving "something appears to be giving" speech in late November. Back then, it concluded that the conflict between strong US growth and disinflation appeared to be resolving in the favour of disinflation. The speech provided an important lead indicator for the Fed's dovish turn at the December FOMC meeting. We presume today that he will stick to that same core message of successful disinflation and will not want to get involved in the fine-tuning of discussing a 2024 easing cycle, but not starting in March. We thus see event risk as a benign one – slightly negative for the dollar and positive for risk.

We also note an overnight story from the Wall Street Journal's Nick Timiraos that the Fed could consider slowing its Quantitative Tightening scheme – US $60bn in US Treasuries currently rolling off the Fed's balance sheet each month – at coming meetings. It is not clear whether this could be on the agenda for the 31 January meeting, but it would also support the less hawkish stance from the Fed announced above.

DXY has clear resistance at 103.10/20 and the case we have outlined above suggests that these levels may well prove the top of the day's trading range. If we are wrong and Waller has been sent out to push back against aggressive easing expectations (markets price 18bp of a 25bp first cut in March and 158bp of easing this year) then DXY can break resistance and head to the 104.00/25 area multi-day.

EUR: ECB pushback underway

The euro is not exactly showing it, but we have started to see some aggressive push-back from European Central Bank hawks against the 150bp of easing expectations priced in by the markets this year. Both Joachim Nagel and Robert Holzmann warned that rate cuts are not guaranteed this year. European interest rates have barely budged on the news and are probably more interested in thoughts from centrists such as Francois Villeroy de Galhau, who speaks this morning, and ECB President Christine Lagarde who speaks early in Davos tomorrow.

Also playing a role here could be some data where today's 10:00 am CET release of the ECB's one-year and three-year CPI consumer expectations survey could modestly reprice the cycle should they come in on the strong side. We put out a note last week that the biggest beneficiary of a less dovish repricing of the ECB cycle could be EUR/CHF. And we recommended a three-month EUR/CHF target at 0.96.

For EUR/USD, there is clean support at 1.0875/80. As above with the DXY, we think the Waller speech could see that support level hold and EUR/USD end higher on the day. If we are wrong about the contents of that speech, a break of 1.0875 opens up 1.0800 on the day.

GBP: Average earnings weighs on sterling

EUR/GBP has edged a little higher in early Europe on the release of UK average earnings data for November. These dipped to a 6.5% 3m/YoY rate – the lowest since last March. Our UK economist James Smith warns that we should not get carried away with this data, however, and that a more important release for the Bank of England will be the December CPI release tomorrow.

Look out for testimony from BoE Governor Andrew Bailey today at 4:00 pm CET. The BoE is not known for over-communication between meetings, but markets now price 130bp of BoE easing this year. If there is pushback against that from Governor Bailey and we are correct with our dollar call today, GBP/USD could turn back to the 1.2750/2800 area.

CEE: Zloty tests weakest levels since November

The CEE region opened the week yesterday with losses across the board, and only the Hungarian forint (HUF) managed to reverse losses to a flat result. As we mentioned yesterday, bearish pressures have arrived in the region, and for now they're here to stay. Yesterday's final inflation estimate in Poland showed a small upward revision of 0.1pp to 6.2% year-on-year. The core component for December will be released today, where we expect a drop from 7.3% to 6.9% YoY. Otherwise, the calendar is empty.

The Czech koruna (CZK) is following the rate move and for now, it looks like we should stay below 24.700 EUR/CZK. HUF seems the most resilient in the region at the moment. Rates seem to have stabilised after almost two weeks of rally. In our view,however, there is still a gap between FX and the rates market that will have to be closed sooner or later. Therefore, we remain negative on HUF these days with EUR/HUF above 380.

More interesting will be developments in Poland, where it seems that the political story is starting to interfere with the sentiment in financial markets. With the Polish zloty (PLN) being the only currency supported by higher rates these days, EUR/PLN briefly tested the highest levels since last November. With a hawkish National Bank of Poland, the IRS curve would indicate EUR/PLN levels more around 4.320. It seems that political noise and heavy long positioning will make PLN suffer in the coming days given that the political story in Poland seems to be just beginning.

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Samantha Luan

Economic

Forex

Central Bank

Dollar rises broadly on risk-off sentiment today, as as Hong Kong stocks led the region lower. The greenback's strength comes despite growing calls for Fed to initiate policy loosening earlier. Notably, Goldman Sachs has joined this chorus, predicting an initial rate cut as early as March and a total of five cuts throughout the year. Concurrently, US 10-year yield has also breached the 4% mark, riding on the overall market sentiment.

The greenback's surge was particularly pronounced against risk-sensitive currencies. Australian and New Zealand Dollar led the decline, with Aussie facing additional pressure from disappointing consumer sentiment data. Canadian Dollar, though showed relative resilience as markets eagerly await Canada's CPI data. On the other hand, Japanese Yen emerged as the second strongest after the Dollar, supported partly by Japan's PPI reading, which, despite falling to its lowest level in nearly two years, still exceeded market expectations.

In the European currency space, Sterling is currently the weakest performer. Market participants are closely watching the upcoming UK employment data, with particular focus on wages growth. Given UK's current CPI level of 3.9%, robust wages growth could potentially hinder the disinflation progress and compel BoE to maintain its current interest rate for a longer period.

From a technical analysis standpoint, EUR/GBP is a pair to watch as Sterling reacts to UK job data. For now, the favored case is that fall from 0.8713 is resuming the larger down trend. As long as 0.8638 minor resistance holds, deeper decline is expected to 0.8548 support first. Firm break there will push EUR/GBP through 0.8491 low to 61.8% projection of 0.8977 to 0.8491 from 0.8764 at 0.8464 next. This week's UK economic data will be pivotal in either reinforcing or challenging this bearish outlook for Sterling. Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_1

Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_1

In Asia, at the time of writing, Nikkei is down -0.62%. Hong Kong HSI is down -1.90%. China Shanghai SSE is down -0.67%. Singapore Strait Times is down -0.29%. Japan 10-year JGB yield is up 0.0258 at 0.583.

Japan's PPI slowed to 0.0% yoy in Dec, reflecting subsidy effects

Japan's PPI records a slowdown from 0.3% yoy to 0.0% yoy in December, above expectation of -0.3% yoy. Nevertheless, this figure represents the lowest PPI reading since -0.9% yoy decline in February 2021.

The deceleration in Japan's wholesale prices can be attributed partially to the government's intervention in the form of subsidies aimed at curbing petrol and utility bills. According to a BoJ official, these subsidies reduced wholesale inflation rate by approximately 0.9 percentage points.

In terms of trade-related price indices, there was a slight increase in export price index from 1.0% yoy to 1.1% yoy. Import price index improved from -10.1% yoy to -9.5% yoy.

On a month-over-month basis, the PPI rose by 0.3% mom, Meanwhile, export price index saw a marginal decline of -0.1% mom, and import price index was flat.

Australia's Westpac consumer sentiment plunges to 81, bleakest start since 90s

Australia's Westpac Consumer Sentiment index dropped by -1.3% mom to 81 in January. This figure is especially significant as it ranks in the bottom 7% of all observations since the inception of the survey in the mid-1970s. The only other instances of more pessimistic starts to the year were observed during the severe recession of the early 1990s.

Westpac attributed this "intense pressure" on consumers to surging cost of living, significantly higher interest rates, and increased tax burden, all of which are collectively impacting consumer incomes.

Despite the subdued consumer sentiment, Westpac highlighted that high inflation remains the primary concern for RBA. This focus on inflation suggests that the upcoming quarterly CPI release at the end of January will be a crucial determinant of RBA's policy decision in February.

"On balance, we expect the RBA to leave rates unchanged in February, and to be unlikely to raise rates further from here," Westpac noted. However, it also cautioned that an unexpected surge in inflation could complicate the decision, making it "a more finely balanced decision".

NZIER survey reveals improved business outlook and steady RBNZ policy anticipated

The latest quarterly survey of business opinion by New Zealand Institute of Economic Research revealed notable improvement in business sentiment. Only a net 2% of firms now expect general business conditions to deteriorate, compared to the 52% pessimism recorded in the previous quarter.

Christina Leung, principal economist at NZIER, expressed confidence that inflation in New Zealand is on track to return to RBNZ's target range of 1% to 3% by the second half of 2024, with a projection of reaching 2% in the first half of 2025.

"It's a pretty encouraging picture for the Reserve Bank and it reinforces our expectations that there won't be further increases," in interest rate, Leung stated.

However, Leung also mentioned that NZIER does not anticipate a reduction in the cash rate until the middle of the next year, advocating for a "wait and see approach." This cautious stance reflects a recognition of the need to monitor economic trends before making significant policy changes.

Looking ahead

UK employment data and German ZEW economic sentiment are the main focuses in European sesion. Later in the day, Canada CPI and US Empire statemanufacturing index will take center stage.

AUD/USD Daily Report

AUD/USD's decline from 0.6870 resumed by breaking through 0.6639 support. Intraday bias is back on the downside. Deeper fall should be seen to 61.8% retracement of 0.6269 to 0.6870 at 0.6497 next. On the upside, break of 0.6728 is needed to indicate completion of the decline. Otherwise, further fall would remain in favor in case of recovery. Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_2

Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_2

In the bigger picture, price actions from 0.6169 (2022 low) could be just a medium term corrective pattern to the down trend from 0.8006 (2021 high). Rise from 0.6269 is seen as the third leg of the pattern that could target 0.7156 on break of 0.6894 resistance. For now, range trading should be seen between 0.6169 and 0.7156 (2023 high), until further developments. Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_3

Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_3

Source: ActionForex

To stay updated on all economic events of today, please check out our Economic calendar

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Damon

Economic

Energy

Since our last report, the price actions of West Texas Oil (a proxy of WTI crude oil futures) have managed to trade above its 13 December 2023 low of US$67.82/barrel and whipsawed around the 20-day moving average in the past two weeks.

Conflicting fundamental factors

There are no clear catalysts to determine whether the bulls or bears are leading the oil market as conflicting factors are at play, thus causing a flux situation at this juncture.

On the positive side that is supporting oil prices is the rising geopolitical risk premium in the Middle East region that could potentially disrupt the oil supplies. The odds are high for an increase in hostilities in the Red Sea shipping route where Yemen’s Houthi militants are showing no signs of backing down in attacking registered ships from Israel and its allies, primarily the US in the Red Sea despite the recent joint counter strikes from US and UK to neutralize these threats.

In addition, Iran, a key stakeholder in the Middle East has started to play a bigger military role in terms of showing its displeasure in the ongoing war between Israel and Hamas by mounting an attack yesterday on Israel’s spy HQ in Iraq as reported by various media outlets.

On the flipside, the demand side narrative for oil remains weak as China’s central bank, PBoC has disappointed market participants by keeping one of its key benchmark interest rates unchanged; the 1-year medium-term lending (MLF) rate was held at 2.5% since August 2023.

This latest monetary policy move from PBoC has signalled that Chinese top policymakers are in no rush to enact more "pronounced" stimulus measures to negate the deflationary risk spiral in China, thus dampening the mood of short-term bullish animal spirits in the oil market.

Potential minor bottoming for WTI crude

Fig 1: West Texas Oil medium-term trend as of 16 Jan 2024 (Source: TradingView, click to enlarge chart)

In the lens of technical analysis, the recent steep drop of -15% of WTI crude from 30 November 2023 to 13 December 2023 has managed to stall at the medium-term ascending trendline support in place since the 20 March 2023 swing low of US$64.21. In addition, it has formed a "higher low" in the past four weeks.

The key resistance of this potential minor bottoming formation stands at US$76.05/78.40 which confluences with 50-day and 200-day moving averages that are acting as price caps as well.

Therefore, in the short to medium term, WTI crude is likely to trade sideways between US$78.40 and US$69.20 (the ascending trendline from the 20 March 2023 low) due to conflicting fundamental factors. Only a clearance above US$78.40 may ignite a more impulsive upmove sequence to see the next medium-term resistances coming in at US$83.20 and US$93.80.

On the other hand, failure to hold at US$69.20 sees a slide to retest the first major support zone at US$67.55/66.35.

To stay updated on all economic events of today, please check out our Economic calendar

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Westpac

Economic

The latest update on business sentiment pointed to resilience in activity and easing inflation pressures.

Key results (seasonally adjusted)

General business confidence: -10.2 (Previous: -49.0)

Trading activity, past three months: 6.3 Previous: -16.8)

Trading activity, next three months: 4.9 (Previous: -12.1)

% of businesses reporting a rise in operating costs over the past 3 months: 54.5 (Previous: 66.3)

% of business who increased output prices over the past 3 months: 38.8 (Previous: 55.8)

The NZIER's latest update on business conditions pointed to a Goldilocks combination of economic conditions at the start of 2024. Trading activity has been resilient and businesses are looking to take on staff. At the same time, the strong inflation pressures that have been buffeting the economy are easing.

On the activity front, businesses have reported a pick-up in trading activity through the final months of 2023. That includes a sizeable rise in manufacturing activity and retail sales, as well as gains in other sectors.

Businesses are also feeling more optimistic about the outlook for trading conditions over the coming months, though the survey is still pointing to modest growth. Conditions are mixed across the economy however. Balanced against firmer activity in sectors like retail, there is expected to be continued softness in areas like construction.

One reason for the firming in business sentiment may have been the change in government, with the new centre-right coalition expected to be much more business friendly. At the same time, many businesses will likely have welcomed the gradual easing in inflation and the related expectation that the interest rate tightening cycle has come to a close.

At the same time, there has been a sharp rise in the number of businesses who are planning on taking on staff in the new year. That comes at the same time as record levels of net migration have made it much easier for businesses to find staff with the skills they've been looking for. There's also been a sharp fall in employee turnover – as economic growth has slowed, increasing numbers of workers who are currently in employment are choosing to stay put. Combined, those conditions likely point to an easing in wage growth over the year ahead.

On the inflation front, today's survey still pointed to strong price and cost pressures, consistent with inflation lingering above 3% for some time yet. However, while still strong, those inflation pressures are dropping back. There's also been a related lift in profitability.

As with other parts of today's survey, inflation pressures have been mixed across industries – retailers and those in the services sector are still reporting strong pressure on input costs and output prices. In contrast, some gauges of construction cost pressures (which drove much of the strength in domestic inflation over the past year) have fallen to low levels.

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Economic

Commodity

Portfolio investors purchased petroleum in the first full week of 2024, reversing sales the previous week and continuing the pattern of choppy trading that has continued since early December.

Hedge funds and other money managers bought the equivalent of 54 million barrels in the six most important petroleum futures and options contracts over the seven days ending on Jan. 9.

Purchases largely reversed sales of 66 million barrels the previous week, according to records filed with ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

In the most recent week, purchases focused on crude (+55 million barrels) reversing the previous week’s crude-dominated sales (-63 million).

There were only minor adjustments in U.S. gasoline (+7 million barrels), U.S. diesel (-7 million) and European gas oil (no change).

Despite some position volatility, the basic picture has remained the same since early December.

Fund managers have been strongly bullish on refined fuels in the United States owing to relatively low inventories and healthy outlook for the economy and fuel consumption.

Funds have been neutral about Brent with plentiful inventories and new sources of supply offset by OPEC+ production cuts and the threat of disruption to export routes from conflict in the Red Sea.

But the hedge fund community has been outright bearish about WTI with plentiful crude inventories in the United States and persistent growth in production from shale producers.

There was some short-covering in the premier NYMEX WTI contract with short positions reduced by 20 million barrels in the most recent week. But remaining short positions are still elevated at 101 million barrels.

From a positioning perspective, there is a significant risk that further short-covering will fuel a sharp rally in WTI prices.

Yet most managers are convinced the fundamentals remain poor with production set to outstrip consumption ensuring prices fall first.

U.S. Natural GAS

Investors are becoming less bearish about the outlook for gas prices in the United States as production growth slows.

Hedge funds and other money managers purchased the equivalent of 369 billion cubic feet (bcf) of gas in the two major futures and options contracts over the seven days ending on Jan. 9.

Funds have bought a total of 1,078 bcf over the most recent four weeks, which was the fastest rate of buying since the middle of 2021.

In consequence, funds had built a net long position of 80 bcf (35th percentile for all weeks since 2010) by Jan. 9 up from a net short of 999 bcf (8th percentile) on Dec. 12.

Working gas inventories were still 320 bcf (+11% or +1.21 standard deviations) above the prior 10-year seasonal average on Jan. 5, the highest for the time of year since 2016.

The surplus had swelled from 60 bcf (+2% or +0.23 standard deviations) near the start of the winter season on Oct. 6.

But production growth had slowed to less than 3% per year by August-October 2023 from more than 6% a year earlier.

Production gains have slowed in response to the sharp fall in prices since mid-2022 and the slowdown is set to deepen into early 2024.

Front-month futures prices have averaged just below $3 per million British thermal units so far in January 2024, which puts them in only the 10th percentile for all months since the start of the century, after adjusting for inflation.

With prices already low and production growth slowing, fund managers are becoming much less bearish on gas prices, even if outright bullishness remains rare at this point.