What next for markets, as UK could be first to cut rates

There is less exuberance in financial markets on this holiday-shortened week. This could be due to overbought conditions, and even some volatility from month end and quarter end rebalancing. While it doesn’t feel like this is the end of the rally that has seen gains of more than 9% for the S&P 500 year to date, and more than 11% for the Eurostoxx 50 index, it does feel like some investors may be waiting on the sidelines to see if they can get in at better levels.

Will they, won’t they, official intervention and the Yen

The same themes as Monday dominated the Asian trading session: China extended its support for the yuan, and a Japanese official did not rule out intervention due to ‘excessive’ moves in the FX market. USD/JPY remains above 151.00, and so far, talking about intervention has not been a remedy for yen weakness. In stock markets, the S&P 500 is predicting a higher open, while European indices including the FTSE 100 could open slightly lower.

What next for the FTSE 100

We still think that the FTSE 100 may chase the key 8,000 level, and on a sterling adjusted basis, this index is close to the high reached on February 2023 above 8,000. There could be room for a broadening of the rally in the FTSE 100, 70% of FTSE 100 stocks are above their 200-day moving averages, compared with 80% of stocks on the Cac 40 and 78% on the S&P 500.

Two camps dominate sentiment towards US stocks

In the US, there seems to be two camps emerging: 1, those who think the US market is due a pullback and is overbought and 2, those who think that the market can continue to rally because the economy is strong. Later on Tuesday a raft of US confidence, manufacturing and house price data will be released, and this could determine where stocks go in the short term. The S&P 500-year-end target has also been revised higher by a number of investment banks in recent days. We don’t think that this battle will be settled this week, especially after the S&P 500 closed down 0.3% at the start of the week.

Will the BoE be the first to cut rates?

Expectations for interest rate cuts are still dominating the market narrative. Interestingly, the market is increasing its bets that the Bank of England will be the first of the major central banks to cut rates. There is now a 20% chance that the BOE could cut rates at their next meeting, compared with a less than 10% chance for the Fed and the ECB. This is a big turnaround that has ramifications for sterling, which may struggle to rally after falling more than 1.5% this month. It could also boost the FTSE 100 back above the 8,000 level.

US debt levels worry some investors

The US seems to be the focus of debt concerns, with the Congressional Budget Office chief sounding warnings about the US’s high debt load that risks a Liz Truss-style meltdown in the US Treasury market, the world’s benchmark sovereign debt market. Added to this, Pimco, the bond fund manager, is favouring Gilts over Treasuries, arguing that the Fed won’t cut rates as quickly as the BOE due to stickier inflation pressures in the US. This is quite the turnaround for the UK.

Economic test could drive market sentiment

There is also a key test for the market’s view that the Federal Reserve will cut interest rates three times this year. On Friday we get the core PCE inflation reading for February. The market expects a 2.8% reading, but anything higher than this could lead to a scaling back of rate expectations since the Fed is still data dependent. Also, the Fed’s Raphael Bostic reiterated his view that he only expects to cut rates once this year. This is a reminder that the Fed Dot Plot, which signaled that FOMC members think there could be three rate cuts this year, is only a median view. There are other members who think there should be fewer cuts. So far, the Bostic comments are not impacting Treasury yields, which fell on Monday.

US/China tensions weigh on markets

US/ China relations are also weighing on the market. US chipmaker Intel fell 1.7% on Monday after China said that it would be limiting the use of US-made chips in government computers. As official relations between Chinese and American politicians falter, a group of US executives have received an invite to meet a top Chinese leader, which Bloomberg reports could be President Xi, later this week. There is a chance that official Chinese relations with corporate American could thaw during this meeting, which may benefit US stocks. Whether or not this leads to an improvement in official relations between China and the US, we shall have to see.

Is Boeing at a turning point?

Boeing was also in the news on Monday and its share price rallied more than 1.3%, after beleaguered CEO David Calhoun announced that he would be leaving at the end of the year and a raft of other executives would do the same. There is no successor as yet, and apparently Calhoun will get to have his say on who should replace him, so this move may not draw a line under safety fears around some of its aircraft. Boeing’s share price is down 25% YTD, and it has massively underperformed the S&P 500 so far this year for good reason. The stock is up more than 6% in the past 5 days, so the resignation of the CEO could be a turning point for this stock.

Earnings season

The Q1earnings season is also on peoples’ minds as they ponder the next move for the stock market. US earnings season will kick off in April. Ahead of this, there are two things to note. Firstly, after reaching a record high last week, analysts now expect the S&P 500 to rally 7% for the rest of this year, according to FactSet. The sectors that are expected to perform the best are healthcare and real estate. Secondly, FactSet also note that the Q4 earnings season saw the second highest number of S&P 500 companies citing ‘AI’ on their earnings calls. The tech sector, unsurprisingly, had the highest number of mentions of AI. Added to this companies that cited AI on earnings calls had seen a better than average stock price performance over the past 12 months, compared with companies that did not cite AI on earnings calls. AI is a major theme, and it is already impacting stock prices of companies who say they use it. We will be watching Q1 earnings season to see if this theme continues.

In contrast, FactSet also reported that the number of companies that have cited ESG on earnings calls has fallen to its lowest level in more than 4 years. This is a sign of how this theme has fallen out of favour, with some companies, especially oil companies, rolling back on their ESG pledges.