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Eyeing Davos and earnings

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By Craig Erlam  

A relatively muted start to the week amid lighter expected trade due to the US bank holiday, with Europe and much of Asia posting small gains.

It’s been a frantic start to the year, so, investors may be capitalising on the opportunity to catch their breath. They won’t have long given the flurry of central bank speak as policymakers gather in Davos this week and as earnings season heats up in the US.

There’s an increasing sense of optimism about 2023 as we make our way through the opening month of the year. The economic data has been kind, to say the least, which is not something we were afforded for most of the past year.

The question now is whether earnings season will enhance that new sense of hope or spoil the party before it really gets going.

Companies have until now been reluctant to let staff go, which has kept the labour market tight, even as certain economic indicators weaken and inflation dampens the outlook for demand and costs. A bad earnings season could undermine hopes of a soft landing that looks more possible now than it has for many months.

Commentary from central bankers will also be closely monitored this week, during the famous gathering in Switzerland. But this time it comes amid much better data from the US and when policymakers have been reluctant to deviate from their hawkish position.

We saw signs of change last week, culminating in 25 basis points being heavily priced in for February. Could we finally see the full dovish pivot?

The end of YCC?

One standout event this week will be the BoJ meeting, amid plenty of speculation around the yield curve control tool and whether it’s time to abandon it.

Japan’s central bank has been very active in the market trying to protect the upper boundary around 0.5% on the 10-year JGB, but the market continues to push back.

Last month’s tweak, rather than buying the central bank time, appears to have massively intensified the pressure on the BoJ and we may learn on Wednesday whether the time has come to tweak it again or abandon it altogether.

Oil buoyed by optimism

Oil prices are marginally lower Monday, but have recovered the bulk of their earlier losses. They’ve been on a good run since getting the year off to a bad start in the opening couple of sessions.

No doubt the improved optimism over the economy is playing a big role in that, with the prospect of fewer rate hikes and maybe even cuts before the year is out making the headwinds less fierce.

China is also a big factor in all of this. Of course, it’s tough to get a true gauge of the disruption the current wave is having on the economy, but there’s no shortage of optimism for the rest of the year, particularly the second half.

It could even come as early as the second quarter, although that very much depends on how rapidly it spreads now. Brent may now be stabilising in the $85-90 range, with WTI just a little lower around $80-85.

Gold eyeing record highs?

Gold is marginally lower Monday after peaking earlier in the session.

It’s running into a little resistance just above the upper end of a key zone, between $1,880-1,920. This had the potential to cause it some difficulty, having done so repeatedly in the past, but that doesn’t appear to be the case. It’s rallied strongly again in recent days and momentum has been rising along with it.

A close above $1,920, backed by momentum, could see attention turn to $2,000, a level it hasn’t traded above since March last year, and even then it only lasted about a week before it fell back below.

Bitcoin making a comeback?

The biggest winner in all of this may be cryptos which have had a rough few months in the aftermath of the FTX collapse.

A boost in risk appetite has triggered a surge in bitcoin which spent the final weeks of last year languishing between $16,000 and $17,000. It is up more than 25% since the turn of the year, breaking back above $20,000 Monday in the process.

Whether this is a sign of it bottoming out and experiencing a resurgence or just a brief rebound isn’t clear, but there are clearly still some very bullish traders out there.

It should make for an interesting few weeks.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.