Asian share markets got off to a cautious start on Monday as the U.S. earnings season loomed large and a slew of Chinese economic data were expected to show the deadening effect of coronavirus restrictions on activity.
A holiday in the United States made for thin trading, but that did not stop Brent crude from extending its bull run toward last year’s peak of $ 86.70 a barrel.
MSCI’s broadest index of Asia-Pacific shares outside Japan was little changed, while Japan’s Nikkei bounced 0.8% after losing 1.2% last week
S&P 500 futures were flat, while Nasdaq futures slipped 0.1%.
The main feature of the market recently has been a rotation into value stocks and away from growth, particularly technology. The S&P 500 information technology sector, which accounts for nearly 29% of the index, has shed 5.5% this year.
With valuations still high, earnings will have to be strong to stop further losses. Overall S&P 500 earnings are expected to climb 23.1% this season, according to Refinitiv IBES, while the tech sector is seen up by 15.6%.
Companies reporting this week include Goldman Sachs, BofA, Morgan Stanley and Netflix.
The market will be spared speeches from Federal Reserve officials this week ahead of their Jan. 25-26 policy meeting, but there has been more than enough hawkish comments to see the market almost fully price in a first rate hike for March.
There was also talk the Fed will start trimming its balance sheet earlier than previously thought, draining some of the excess liquidity from world markets.
Yields on cash 10-year Treasuries climbed to their highest in a year at 1.8%, while futures implied yield of 1.83% early on Monday.
“The implications of quantitative tightening continue to occupy markets as an earlier Fed balance sheet runoff looms,” noted analysts at Barclays.
“Meanwhile, new COVID lockdowns in China could re-aggravate global supply bottlenecks, while in both Europe and the U.S. the near-term growth outlook is now weaker and the 2022 inflation profiles higher.”
Data out of China due on Monday are expected to show retail sales and industrial output slowed further in December. The economy is forecast to have grown 1.1% in the fourth quarter, though the annual pace is seen slowing to 3.6% from 4.9%.
BEWARE THE BOJ
A Bank of Japan (BOJ) policy meeting this week will bear watching given talk it will revise up its outlook for growth and inflation, while sources told Reuters policy makers were debating how soon they could start telegraphing an eventual interest rate hike.
While a move is unlikely this year, financial markets may be under-estimating its readiness to gradually phase out its once-radical stimulus programme.
This was one reason the yen has rallied, with the dollar slipping 1.2% last week to last stand at 114.29 but still well above major chart support at 112.52.
The euro also gained 0.5% last week as the dollar eased broadly and was last changing hands at $ 1.1408. The dollar index was a shade firmer at 95.231, after touching a 10-week trough at 94.626 on Friday.
“We continue to think that the greenback will strengthen again before long, as we expect strong cyclical price pressures in the U.S. to mean the Fed tightens by more and for longer than investors currently discount,” argued Joseph Marlow, an economist at Capital Economics.
They see Fed rates topping 2.5% while the market has priced in a peak around 1.75-2.0%..
The risk of higher rates kept non-yielding gold restrained at $ 1,817 an ounce, while industrial and energy resources have benefited from resilient demand and limited supplies.
Oil prices have climbed for four weeks straight and such is demand that physical barrels of oil are changing hands at near record high premiums.
Early Monday, Brent had added another 51 cents to $ 86.57 a barrel and was approaching the 2021 top of $ 86.70 and the 2018 peak at $ 86.74. A break there, would take it to heights last visited in 2014.
U.S. crude also firmed 75 cents to $ 84.57 per barrel.
