After a solid start to the year, markets took a step back last week, and bond yields sagged further on renewed doubts over the growth outlook. At the same time, the U.S. ran into the debt ceiling, setting up possibly months of headlines and negotiation while extraordinary funding measures get used.
Suppose you thought it was going to be a very uneven trading environment. In that case, the debt ceiling sideshow, where congress always eventually finds a way, will likely create more headline havoc than what it implies for long-term investment strategies. But in the end, it usually takes some hint of market chaos to bring politicians cowering to the table on any debate.
S&P 500 earnings season kicked off last week. So far, only 44% of the 55 companies reporting have beaten consensus EPS estimates. This week, investors will learn how companies representing 25% of the S&P 500 market cap fared in 4Q and view the forward operating environment.
Last week’s craggy earnings cadence may have nudged some investors to move to the sidelines even as the broader global growth picture continues to improve amidst a better outlook for China and Europe and decelerating inflation in the U.S.
Bottom line: Ultimately, valuations may place a ceiling on index performance in the year ahead, even if fundamental catalysts emerge.
Chinese Lunar New Year holiday( LNY), which began on Sunday, could temper price action as traders sit tight, waiting to gauge real-time consumption and mobility data trends against a likely meteoric rise in Covid cases post-LNY.
China’s market closed at a high point last week even though monthly and quarterly headline numbers appear stronger than high-frequency data and other official measures. And while many market participants are skeptical of the Q4 GDP data but for forward discounting assets like stocks where folks are betting on Q2 and Q3 absolute “lift-off,” it is easy to look through any data disparities as intuitively, from a pent-up consumer demand perspective, it is easy to digest that consumption will be much much higher later in the year.
Bottom line: In Q2, everything grows faster everywhere in China
Oil prices spent the better part of last week grinding higher as oil demand is expected to hit record levels in 2023. Despite high costs and even with massive efforts to decarbonize, global oil demand is expected to rise by 1.9 million barrels per day(bpd) this year, according to the IEA. The market continues to run with this guidance after the group bumped its forecast by 200,000 bpd due to China’s abrupt decision to end its zero-COVID strategy.
And, lest we forget, the EU Russian products embargo is just around the corner. Oil flows are expected to drop some due to tanker constraints and could even slide further depending on Russian geopolitical strategy.
Short-term dips should be well covered.
Even though we pencilled in $100/bbl, we see greater upside risk than downside to our 2023 call.