By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Stocks gained yesterday, while the USD and USTs faced headwinds with participants again re-assessing Stateside exposures, as the UK descended into fresh political chaos. US retail sales highlight the calendar today.
WHERE WE STAND – For a day with no top-tier (or any-tier) data releases, quite a lot happened as the new trading week got underway.
I’ll come to the latest episode of the Westminster soap opera in a moment, but let’s start on a broader level, as yesterday saw a return of the ‘bye America’ trade, at least in the FX & rates world, ostensibly spurred on by reports that China had urged its domestic banks to curb exposure to Treasuries, citing concerns over concentration, and recent market volatility.
Frankly, I’m not sure that there’s much especially new in the reports, and would frame this more as another example of investors en masse re-assessing their exposures to the US in an era of structurally higher policy volatility in Washington DC, as opposed to any sort of Chinese geopolitical ploy. Certainly, we’re not going to be seeing some sort of ‘fire sale’ of Treasury holdings, given how counter-productive this would be for all involved, though you would expect any flows out of the complex to find their way into metals, namely gold, which does strengthen an already-robust bull case there.
In any case, the ‘bye America’ vibe was most evident in the FX complex, with the day dominated by broad-based USD weakness across the board, as the DXY slipped back beneath the 97 figure for the first time since the back end of last month. Given the risk-on nature of trade in the equity complex, it wasn’t especially surprising to see the Aussie towards the top of the G10 board, cementing recent gains north of the 70 handle, though it was a bit of a headscratcher to see another day of chunky gains for the Swissie, which perhaps attracted some degree of haven demand.
The JPY also gained a chunk, admittedly the polar opposite of the reaction I’d expected to PM Takaichi’s LDP having obtained a two-thirds majority in the weekend’s lower house elections. I guess the logic here is that such a significant mandate reduces the need for more ‘extreme’ fiscal loosening, with nerves having also been soothed by FinMin Katayama having remarked that no additional JGB issuance is planned. Still, caution is needed here given the ‘have cake and eat it’ strategy of loose fiscal policy, combined with sluggish BoJ tightening, that Takaichi seems intent on pursuing. Downside JPY risks have hardly been eliminated at this stage.
Meanwhile, as alluded to, equities started the week with gains on both sides of the pond, as the tech sector outperformed – notably bucking the trend of cyclical rotation which dominated last week. In any case, I continue to view the path of least resistance as leading higher, and dips as buying opportunities, with economic growth robust, earnings growth solid, as well as looser monetary and fiscal backdrops providing a further tailwind.
I’ll end with the UK. On a tumultuous day in Westminster, the Prime Minister, having lost his Chief of Staff on Sunday, lost his Director of Communications yesterday, while the leader of the Scottish Labour Party called for PM Starmer’s head. That said, after the Cabinet rallied round the PM, and former Deputy Leader Rayner also offered her support, peak danger in terms of Starmer’s political future appears to have passed for now.
Hence, Starmer will likely stagger on, essentially a PM in name only with little political capital remaining to enact any significant policy proposals or legislative measures, prolonging his inevitable departure for a little longer. The Gorton & Denton by-election on 26th Feb, and more importantly local elections on 7th May, remain key dates to watch. While Cabinet support shows that the ‘herd’ is together for now, that likely owes more to nobody yet being in a position to run, than it does loyalty to the boss.
Risks for the GBP, and Gilts, remain tilted to the downside, not only amid ongoing political uncertainty, but also as participants increasingly reprice a higher fiscal risk premium, given the high likelihood that Starmer’s eventual successor will adopt a significantly looser overall fiscal stance.
LOOK AHEAD – December’s US retail sales report highlights the calendar today, with headline sales set to have risen by 0.4% MoM over the festive period.
While likely not as market-moving as tomorrow’s jobs report, nor Friday’s CPI figures, the report will nevertheless be watched very closely indeed, especially as consumer confidence has soured notably in recent months, amid emerging cracks in the labour market. Of note, January’s retail sales figures are due next week.
Besides that, the US sells 3-year notes this evening, which should be digested with relative ease, while we’re also due to hear from 2026 FOMC voters Hammack and Logan this afternoon.