 Good morning. Welcome to CMC markets on Friday the 27th of January and this quick look at the week ahead beginning the 30th of January with me Michael Houston and It's been a little bit of a mixed bag of a week for European markets struggled for direction the tad Finished the day higher yesterday after two days of minor losses US markets on the other hand Haven't really struggled for direction this week They have started to play catch up with the gains that we saw in the Early part of this year on the early part of January actually with respect to European markets and I Think a large part of that has been on the back of Some of recent US economic data, which does appear to be pointing to To a US economy that's fairly resilient weekly jobless claims fell back to a hundred and eighty six thousand from a hundred and ninety two thousand The week before so the US labor market looks fairly tight Which means unemployment is likely to stay fairly low at the same time US fourth quarter GDP came in at two point nine percent While personal consumption fell to two point one. So there are pockets of weakness in terms of spending retail sales But ultimately I think Markets are coming to the conclusion as we look ahead to next week and next week is going to be a big week for markets Given the fact that we've got the Federal Reserve the European Central Bank and the Bank of England all Looking to raise rates next week with really I think the only narrative being what comes after Next week's rate hikes and on that there is a whole host of discussion threads About what could well Come next but certainly I think what we're seeing in terms of bond markets is the in the US The expectation is that we could see a 25 basis point rate hike While at the same time There's a growing belief that perhaps We are very very close to the end of the Federal Reserve's rate hiking cycle That view gained further traction earlier this week when the Bank of Canada Initiated a pause in their rate hiking cycle after hiking by 25 basis points And it would appear that the markets have drawn a straight line from that decision To the conclusion that the Federal Reserve will do the same thing and that's what's driven this week's move higher in US equity markets and to a certain extent is blown a bit of a hole in my theory that European markets might Or should outperform US markets because we've seen a big push-up in the NASDAQ we've pushed through that trend line resistance from the highs last year we've also Pushed above the 200 day moving average Which would suggest that we are on course to make further gains and certainly on the basis of the charts That does appear to be the case, but I would still inject an element of caution into that narrative We are still below the highs that we saw in November and December on the NASDAQ So there is certainly an awful lot of what I would call room for maneuver When it comes to potentially arguing that the Further gains in the NASDAQ could be Hardest to sustain certainly. I think the earnings numbers that we've seen so far this week What appear to suggest that there are pockets of weakness in the US economy? Microsoft numbers did prompt a little bit of a sell-off because of the downgraded downgraded future guidance for Q3 Tesla shares on the other hand pop tire on the promise from COE Elon Musk that Tesla might be able to produce two million cars in its nests or Yeah, produce two million cars in its next fiscal year So there's certainly an awful lot of optimism based on that particular forecast And of course whether the margins are sustainable is another matter Similarly the S&P 500 has broken above finally broken above its trend line resistance as well But again as in the NASDAQ We're still above the high or still below the highs that we saw the back end of last year around about 4,080 and I think that for me is probably the more critical level Yes, the the the moving averages here Do appear to suggest that we're about to cross over With the potential for the 50 day to cross above the 200 day Which is normally a bullish sign a golden cross But there's also the fact that both moving averages are flattening out Which would appear to suggest that maybe US markets are going to undergo a period of consolidation after the declines of the of the past 12 months And I think that's the key here Obviously an awful lot will depend on the messaging that comes out from central banks this week And obviously that's something that markets are certainly going to have to chew over Um bond markets Are at the moment the two year yield the us two year yield is still in that range of between four percent And four point three percent Um, and while it remains so that suggests to me that there's still an awful lot of uncertainty about What's going to happen to us rates over the course of the rest of the year? Um, the market is still potentially pricing in a rate cut this year You know looking at the numbers looking at the cpi numbers out of japan um this morning Which saw tokyo cpi hit its highest level since 1981 4.4 percent suggests that global inflation is going to be an awful lot stickier The markets are currently pricing, you know, and I think for me that is potentially um A risk that markets haven't as yet priced So keep an eye on those two resistance levels on the nasdaq and The s and p The footsie 100 has had a little bit of a setback this week. It's probably traded sideways From the highs that we saw In the middle of the month 78 75 we've drifted back But what this move Really here has told me is that we are looking to consolidate And what's interesting to note is that we're consolidating. We're just chopping We're chopping above that previous resistance, which is now likely to act as supported around about 7 690 and the overbought state of the index is starting to work its way out Which would suggest that we could see a little bit of a dip but ultimately You know the uptrend that we've been in since those october lows remains very much intact and it's very premature The star arguing that we've seen the highs for the year as an awful lot of people on financial tv Have been arguing or postulating should we say I don't think they've been arguing that they've been postulating it So let's look at the DAX similar sort of story We traded sideways this week and again the market is working out It's overbought state by trading sideways Which again suggests that there is no over bearishness creeping into the market at the moment We could well trade sideways or drift back towards this trend line support here as well as these previous peaks back at 14500 So for the time being The outlook still remains positive for equities particularly european equities and what we're seeing here at the moment Is a little bit of a pause And as I articulated last week when you look at us markets on a valuation basis They are much more expensive. So certainly in terms of further upside The case is much less compelling. Well, so I think also helping to support markets at the moment Is natural gas prices? They continue to come down Even if oil prices aren't now obviously that is a key component to household budgets household energy bills and essentially the running costs of business Across europe and the uk if they continue to come down Then the energy price cap that we're looking at in april May not increase in fact probably won't increase now Obviously, there's an awful lot of water to flow under that particular bridge between now and april given the fact that Germany the uk and the us Have now agreed to supply Tanks to ukraine in their war against russia. So certainly putin continues to remain A potential huge fly in the ointment and developments between russia and ukraine and any escalations there are likely to impact On risk, but for the here and now Equity markets still remain very much in the uptrends that they've been in Over the course of the past few weeks and at the moment for the moment to show little signs of Falling back sharply the dollar continues to chop sideways We look at euro dollar and we look at central bank meetings next week And for all the hawkishness that's coming out of ecb officials euro dollar does not want to go above 109 30 So, what does that tell you Well, it tells me That for all the hawkishness that's coming out from ecb officials and the talk of Three more 50 basis point rate hikes markets are struggling to adapt or believe that narrative And I think that's you know, I think that's That's a real issue. I think for the ecb But more importantly, I think Markets are waiting to find out What's going to come out from the fomc this week? So the big question Is how much further do we have to go when it comes to additional rate rises? From central banks this year starting with the fed Obviously over the past month. We've seen splits open up on the fomc as to whether we'll see a step down to 25 Or whether we follow up with a 50 basis point hike seen in september with another 50 basis point rate move I personally think that we should the fed does have room to go buy another 50 The big question is will they or given the data that we've seen this week They certainly got room because the US labor market continues to remain extremely resilient that being said when you've had the likes Patrick Harker of the Philadelphia Fed and Laurie Logan of the Dallas Fed stating they'd be comfortable with a 25 basis point rate move And who are both voting members on the committee? While Fed Governor Chris Waller who is in the past lent towards the hawkish side echoing those very same sentiments You have to think that potentially We could well see a 25 basis point hike In the coming week the bigger question however is what sort of guidance comes after that You know, and I think that's what that's that's the narrative or the nuance That markets are potentially overlooking if the Fed goes by 25 basis points and doesn't push back that This is the end You know, this is not the end of the rate hiking cycle Then they could loosen financial conditions further and run the risk of it making inflation a lot stickier than it needs to be And I think with that in mind and given the fact there's probably a wide range of views on the FOMC And you've got the likes of Neil Kashkari who's been very quiet recently Of the minute Minneapolis Fed Neil Kashkari of the Minneapolis Fed who said that he favored a pause at 5.4 percent Then you can see that there is definitely a hawk dove split Opening up on the FOMC. So I think you'll be a surprise in the extreme If we saw a federal reserve that indicated That um, they were probably done after next week's rate hike The likelihood is they're going to keep open the possibility Of a Fed funds rate the terminal rate of over and above 5% which means that potentially there could be another one or two rate hikes coming down the pipe at the very least And if they do push that Then you could see Risk take a turn for the worst particularly in the U.S. And the dollar rebound quite strongly Following that we've got the Bank of England rate decision and we've got the ECB rate decision. So You know when we when we summarize when we summarize the Fed there are a number of different things that the Fed can do By being by delivering a hawkish 25 basis points rate hike And they could also look at maybe I'm changing the pace of balance sheet reduction or quantitative tightening as a way to tightening up monetary conditions or financial conditions as well So there's a number of options the Fed can do moving on to the Bank of England Slightly different story. We look at obviously euro dollar and is a fairly decent top of 109 30 We look at cable and there's a similar sort of top at 124 and a half On this chart here. We're really struggling to get back through that But what's interesting is that we're not really dipping back below 122 and a half um As regards to the Bank of England, I'm slightly more skeptical because the Bank of England has a propensity an annoying propensity Um to talk the pound down whenever it raises interest rates And it is on the horns of a dilemma because ultimately in the uk Inflation is still very much in double digit territory Although the economy may not be as bad as perhaps was thought at the end of last year Certainly the slide on energy prices has helped and has alleviated some of the pressure on wage packets But wage growth is still around about six and a half to seven percent and food price inflation Is is still at 16 percent So they'll need to be acutely aware that a weak pound Will make headline inflation much stickier than needs to be If they show any indication they're going soft when it comes to hitting their inflation target Of course, there will be the normal concerns about the impact on mortgage costs from another 50 basis points move But five year guilt yields have barely moved since the low setback in november Although two year yields are slightly higher. Whatever we get this week We're likely to see another split on the mpc With the likes of temreiro and dingra likely to be the most averse to another hike Given that they voted for no change In december The likes of kathry man are likely to push for another 50 basis points while the rest of the committee are expected to split between 25 And 50 from the current three and a half percent So the big the big debate I think is whether we do 25 to 3.75 Or 50 by Or another 50 to 4 now if they go by 50 to 4 percent It's more than likely that they will issue some extremely dovish guidance And potentially say they're probably closer to the end of their hiking cycle Or very close to the end of their hiking cycle, which to my mind I think would be a mistake when you've got inflation cpi inflation still at 10 and a half percent and wage growth I'm approaching six and a half seven percent, but you know I'm not on the npc. So what do we get from the npc? It may not help the pound in a short term Given the propensity of the bank of england to talk the pound lower whenever they meet Nonetheless decent resistance at 124 and a half if we do break above that Then we certainly got potential to go to 126 and on the balance of probabilities I'm still probably more Leaning towards the bullish side than I am the bearish side, but you know, that's if you really twisted my arm Euro snarling Again range trade we did have a bit of a squeeze earlier this month to 89 But we're still back above the 50 in the 100 day moving average That is likely to continue to act the support in the short to medium term That's pretty much like watching paint dry. So let's talk about the ecb Because we're probably going to get 50 basis points this week from the ecb Certainly the the the narrative has been pretty much leaning towards the hawkish side And president legard has doubled down On an aggressive rate hiking cycle in the wake of the davos economic forum Saying that inflation is still way too high And markets are underestimating the ecb's resolve to drive prices back towards their 2% inflation target so I think while we can expect to see another for 50 basis point 50 basis point hike in february There were a number on the governing council who wanted 75 basis points back in december So certainly I think it's 50 is the minimum or we can expect And certainly there is an awful lot of guidance coming out of the ecb that we can expect another 100 basis points after that of course The big unknown is whether the ecb will be able to Deliver that and I think that's what markets are currently struggling with You know the ecb is talking tough. The bigger question is What effect that might have on bond yields and financial conditions in the more vulnerable Countries in the euro area So that's good. Those are the three big decisions this week And I haven't even mentioned non-farm payrolls yet. Um, which I'll do out on friday Certainly the consensus continues to a downshift in us rate rise expectations And a 25 basis points rate hike on wednesday But if the us labor market continues to hold up and we continue to get decent payrolls growth Then certainly 25 basis points is not going to be the end of it We're going to we're probably going to get another 25 or 50 in subsequent months It's just the pace will slow But the fed needs to keep its foot in and consequently I still think that we will see a fairly fairly decent payrolls report Which will mean that the shift in focus after wednesday Will be on what comes at the next meeting and it will probably be another 25 basis points at the fed meeting after This week's payrolls numbers just a quick reminder as to what we're expecting For non-farm payrolls Let's not forget that we saw 223 jobs added in december the unemployment rate fell to 3.5 percent, but Average hourly earnings came in below expectations rising by 4.6 Participation rates edged back up in december positive if you think that The tight labor market will bring people back into the workforce And january payrolls is expected to come in at 175 175 thousand With the unemployment rate set to remain pretty much where it is that we could see an edge up to 3.6 percent On the earnings front we've got i'm going to pick out Um a couple here because i'm starting to run out of time when it comes to this week's week head Shell is one of the notable uk ones Obviously, we heard earlier this week US oil company chevron announced a 75 billion dollar buyback Which once again invited criticism from the white house Um, not unreasonably in my view. I think that all companies could be paying an awful lot more to help with the energy transition and certainly windfall taxes are a symptom of Government's perception that they are reluctant to do that um, but once again, I think they're likely to be um a touch point again for more criticism from politicians about profit profiteering on the back of rising Oil and natural gas prices It's also notable that natural gas prices have been falling out of being falling consistently for the past six months While on the other hand oil prices have been rising so um, certainly in terms of what the company reported in q3 Shell saw adjusted profits coming at 9.45 billion dollars Which was slightly below market expectations. They announced another share buyback program This one being to the tune of four billion dollars and which should be completed by q4 dividend was also right the dividend also rose by 15 percent So 18.5 billion dollars in share buyback so far year-to-date and a 15 percent rise in dividends indicates where management priorities lies So however as in an exercise in pr We're probably going to get another firestorm of criticism from the usual suspects Even as Shell's effective tax rate on uk profits Now since that's 75 cent So as in previous quarters the bulk of its profits have come from its upstream business and integrated gas this could well come in lower um At the start of this year shell said its q4 numbers will be affected by the various windfall taxes Which are coming into the tune will affect it to the tune of two billion dollars The company also said it's integrated gas trading numbers Which have traditionally been a key revenue earner. We're going to be significantly better than they were in q3 um, so another thing is Shell has a new ceo ben van burden has gone so It'll be interesting to see whether or not new ceo whale sarwan Changes the narrative around investments in renewables and future investments in liquefied natural gas And how he accelerates a process in investing in renewables that's seen shell fall behind the likes of BP Certainly in terms of the uptrend decent support at a 50 day moving average fairly decent resistance in and around these highs at around about 24 50 But ultimately expect a fairly decent set of numbers and potentially A further push towards the upside we've also got apples numbers out this week and Again here with apple I think the I think the key thing here for me is that What is traditionally its best quarter its first quarter I think a key bellwether is how well sales have gone in the lead up to um, the christmas trading period certainly china um posed some significant challenges for apple um over the past quarter the well documented problems Foxconn There's china supply chain issues that occurred at the end of last year and which saw apple issue warning over its iphone production and a potential shortfall of up to six million handsets now um When the company reported in q4 all the numbers were in line with market expectations albeit with a slightly negative bias After services revenue for fell short as did iphone revenue. So um As a good benchmark, I think if we look at what apple reported last year for q1 um It's unlikely that we'll get anywhere close to that but just as a just as an exercise in comparison um apple reported iphone revenues Of 71.6 billion dollars of a total of nearly 124 billion dollars q4 revenues came in at 90.15 a billion dollars so you'd like to think that in q1 q1 should be better than q4 so q4 was 90 billion dollars q1 last year was 124 It may well be somewhere in the middle of that but what if it's not Yeah, and then you know, what's what's the rest of the year going to look like So I think this year's this this year's q1 apple numbers could be an exercise an interesting exercise in comparisons when it comes to quarters I'm going to finish off. I think with amazon that's particularly interesting in the context of The numbers that we saw come out of microsoft and the growth that we saw In it's as your business or cloud business amazon shares got a nice little Tick higher on the back of those microsoft numbers. The bigger question is Will it be enough to shake amazon's share price out of the downtrend? Then it's been in over the course of the past 12 to 18 months We found fairly decent supported around the 80 dollars level Finding a little bit of resistance at 100 dollars Um, certainly I think um When we look at how amazon has performed and the write downs in its rivian business or its stake It's write downs of its stake in the rivian business I think it's going to be a struggle for amazon to post anywhere type of a decent profit And amazon is also investing huge Amounts of money into its aws business over the next few years saying it intends to spend an extra 35 billion dollars by To boost capacity as you expect us to post a very small profit of around about 17 cents a share but it has It has to get a handle on its costs Because they rose sharply They've risen sharply over the last nine months and they're currently at 355 point 27 billion dollars up from 311 billion dollars a year ago So it's an increase of 14 percent now taking some steps to address this with the announcement of thousand job cuts over the last few weeks However, these still pan into insignificance when you consider the company has increased its headcount By almost 1 million people Since 2019 So it could it could struggle to turn a profit this quarter It said that in q3 And it'll be interesting to see whether or not it's been able to do so So that's amazon we've also got alphabet And we've also got meta So they will also be closely watched for any signs of hits particularly on the advertising side certainly in terms of Alphabet google youtube revenue. What have you whether or not we see an impact there As people spend less and less money on advertising on those particular channels and whether or not tiktok has cannibalized instagram's Revenues further. So that's it for this week. Thank you very much for listening Michael Houston talking to you from cmc markets