The week ahead: Chip wars, FX in focus, and eyes on European stocks as we near the end of Q1

Last week highlighted how central banks are directing asset markets right now. As we get to the peak of the hiking cycle and wait for the next move from the Fed, the BOE and the ECB, the markets are happy to extend gains and rally into the end of Q1. The surprising thing about Q1 was the lack of stock market volatility, the Vix remains below its average level of the past year. The question is, can subdued volatility and strong stock market gains continue into Q2?

The US markets including the S&P 500 and the Dow Jones all reached fresh record highs last week, and although the S&P 500 slipped on Friday, it still broke a two-week losing streak and rose by nearly 2.3%. However, trade wars between China and the US may limit gains at the start of the week. Key US chipmakers AMD and Intel, are declining in the pre-market after China said it would limit the use of US-made chips in government computers. This is a theme that is likely to grow as we move towards the US elections at the end of this year. The FTSE 100 also made a record high in GBP terms last week, and is now only 70 points away from the key 8,000 level. However, as we embark on the last week of Q1, the focus could shift to FX.

Currencies in focus as Japan threatens to intervene

The FX market took second place to stocks last week. However, at the start of the week, the dollar dominance that we saw last week is being challenged. The dollar rose against all of the major G10 currencies last week and rose by 1.5% vs. the yen. USD/JPY surged after the BOJ performed a ‘dovish hike’, and ended the era of negative interest rates, but did not say that further rate hikes would be forthcoming. USD/JPY jumped back above the key 150.00 level and made a fresh 2024 high. The pair has given back some gains at the start of the week, after Japan’s top currency official warned against speculative moves. In terms of the size of the wave of the yen selling, this was fairly feeble push back and is unlikely to move the dial too much for this currency pair and we could see fresh gains unless US economic data, the Fed or more aggressive BOJ intervention can stop the dollar in its tracks.

China supports the Yuan

Asian currencies were in focus at the start of the week, as China also stepped in to limit downside pressure on its currency vs. the USD. Chinese authorities stepped in to fix the currency pair below 7.10, however, without a wave of official currency intervention to stem the decline in the CNY, we believe this currency would be far lower, due to the tepid economic recovery in China and the fact that other Asian currencies are struggling vs, the USD.

We think that the euro and the pound could be the first to recover vs. the USD, after both currencies took a hammering vs. the USD last week. GBP/USD is down more than 2% so far this month, as a dovish shift at the BOE opens the way to earlier rate cuts. This pair fell below $1.26 on Friday, but it has since clawed its way back above this key short-term level. Traction has been weak early on Monday, and we may need to wait until later today to see if it can continue to extend gains.

Iron ore is a proxy for Chinese recovery

Commodities have seen some large price moves in the past week. After a strong month, oil prices fell sharply, WTI crude fell by 2% last week and the Brent crude price was down by 1.2%. There were also large declines for Nat Gas and heating oil. Industrial commodities were mixed. For example, Iron ore was higher by 7%, while copper fell by 2%. Iron ore had its best weekly gain since September on increasing chances of a recovery in China. The Chinese premier said on Sunday that there is still plenty of space for policy support, which could limit any downside for commodities at the start of this week. If China does support its economy, then iron ore may see a sustained rally after falling 17% YTD. If you want to know whether the market is upbeat about China’s economic prospects, then check out the price of iron ore.

Copper demand remains strong as global economic outlook brightens

Copper weakened last week; however, it could make fresh gains after signs of strong buyer interest. The number of outstanding contracts in copper soared above 300,000 last week. This is the highest level in 2.5 years, which is a sign of strong buyer demand and is also a sign of faith in the global economic cycle as major central banks look set to cut rates in the coming months, and China has indicated that it may have room to add more stimulus.

Gold was also volatile last week, but it managed to eke out a 0.35% gain. The yellow metal is considered an inflation hedge and it has rallied by 5% this year as central banks get ready for rate cuts. Residual concern about lingering inflation could keep the gold price supported, even if it is moving sideways after making a record high at $2,186 last week.

Bitcoin shows its colours

Bitcoin has had a month of two halves. After reaching a record high on 13th March above $73,000, this pair fell sharply last week and dipped below $67,000. It is making a comeback on Monday and is currently higher by $845. The king of crypto currencies is never a one-way bet, it is notoriously volatile, and the hype has no doubt burned some novice bitcoin traders. Even so, the halving is coming up next month, which could limit downside for Bitcoin.

PCE data is key for US Fed expectations

On the economic data front, the US will be in focus as things are quiet in Europe leading up to Easter. Key data points to watch out for this week include US home sales, the final reading of US Q4 GDP and the Fed’s preferred inflation gauge, the core PCE for February. Personal income and personal spending will also be worth watching. Analysts are expecting little change when it comes to the core PCE for February, and the annual rate of core PCE growth is expected to remain at 2.8% for last month. The monthly rate is expected to expand at a 0.3% pace. If the analysts are correct, then this could be enough for the Fed to continue its current message that rate cuts are coming.

European March inflation data to watch

European and UK data releases are fairly thin on the ground this week, with the final reading of Q4 GDP for the UK, and early March retail sales reports. In Europe, confidence data is released on Wednesday, and German unemployment will be worth watching on Thursday. France and Spain will kick off March CPI readings for this week. The market expects a decline in French CPI to 2.8% from 3.2% in February. However, Spain is expected to see price increases, with the EU harmonized rate of CPI rising to 3.2% from 2.9%, although the core rate of CPI is expected to fall slightly to 3.4% from 3.5%. If we get an upside surprise in the March inflation figures, then it could knock the recent European stock market rally, that has seen the Eurostoxx 50 index rally more than 11% so far this year, outpacing gains for the S&P 500, which is higher by 9.74%.

April gains all depend on earnings

Looking ahead, Q1 earnings combined with firmer expectations that the Fed, the ECB and the BOE will all follow the SNB and cut rates are what will keep this rally alive as we move into Q2. Without these key drivers, we could see risk appetite drain, and stocks may not be able to follow Q1’s strong market performance.