Markets Choppy As Sentiment Stays Soft

WHERE WE STAND – A shaky start to the week, yesterday, with markets remaining volatile despite participants continuing to scavenge around for a catalyst, or a theme, to latch onto.

Sentiment, on the whole, was somewhat soft, with stocks paring intraday gains in rather rapid fashion as trade wore on, seeing both the S&P and Nasdaq end the day fairly deep in the red, ultimately closing at the lows. Clearly, despite those early gains, the market is far from being ‘out of the woods’, amid , continuing  jitters over the US economy’s continued outperformance, sparked by dismal services PMI and UMich sentiment data last week, continue to linger.

Furthermore, conviction to buy the dip remains somewhat lacking, ahead of earnings from Nvidia (NVDA) after the close on Wednesday, which are this week’s standout risk event. That said, I still see the path of least resistance as leading to the upside, once the risk of these earnings has been successfully navigated.

European equities, in contrast, traded well, with the DAX adding over 1% intraday, as participants sought solace in Sunday’s German election results, with a ‘Grand Coalition’ between the CDU/CSU and SPD likely to be agreed relatively easily, and in relatively short order, lifting a cloud of political uncertainty that had been hanging over Europe’s largest economy.

Despite that, the election result isn’t quite as market-positive an outcome as it could’ve been, with opposition parties, including the far-right AfD, seemingly having won enough Bundestag seats to obtain a ‘blocking minority’ in the lower house. This, in turn, is likely to make debt brake reform significantly harder to come by, as the necessary 2/3rds majority of Bundestag members will be harder to obtain, without granting concessions.

This is the likely reason behind the EUR paring its intraday rally north of the $1.05 mark as trade went on, with participants slowly but surely realising that the prospect of rapid fiscal reform, and subsequent stimulus to turn around the ailing German economy, is a rather slim probability. In any case, now that coalition negotiations are underway, barring any hiccups, the common currency will likely take its steer from geopolitical developments, chiefly regarding a potential Ukraine peace deal, as opposed to domestic political events.

The choppiness seen in the common currency was broadly reflective of conditions in the FX market at large as the week got underway, with month-end flows possibly also contributing to the bumpy nature of trade. Those flows, incidentally, likely lean marginally USD-positive, ahead of corporate month end on Wednesday.

Flows aside, I remain keen to buy this dollar dip. Fears over the fading of the ‘US exceptionalism’ theme seem overblown, particularly when most of said concerns appear to rest on either politically-skewed consumer sentiment figures, or January macro data which was likely distorted by California wildfires, and a snap of cold weather. Fundamentally, the labour market remains tight and, while inflation progress has been sluggish of late, the economy isn’t exactly buckling under the weight of restrictive monetary policy. Haven demand, and a market that’s potentially overly-complacent on the tariff front, are a couple of other potential bullish catalysts.

The big risk, here, is that there might not be a ‘Trump put’ – i.e., the President may be prepared to sacrifice economic growth in order to realise greater savings as part of the ‘DOGE’ government efficiency push; and/or the Admin might push ahead with tariffs in order to balance perceived trade unfairness, and not use them solely as a negotiating ploy, even if those measures create substantial macro & market headwinds. Thus far, Trump’s ‘bark’ has been worse than his ‘bite’, though assuming that stance will hold water for the next four years might well prove folly.

Anyway, some of that recent USD weakness has begun to fade, with cable backing away from fresh YTD highs as yesterday’s session progressed. I still find little-to-nothing to like about the quid, as the UK economic backdrop remains one resembling a stagflationary mess. The re-appointment of the MPC’s resident uber-dove, Swati Dhingra, to another three year term hardly provides much reassurance either.

LOOK AHEAD – Another data docket lacking in major catalysts lies ahead, at least in terms of the upcoming data docket.

A dearth of top-tier data lies ahead, though I guess this afternoon’s US consumer confidence figures might attract more attention than usual, given not only ongoing worries over the US economy, but also the dismal (albeit politically skewed) UMich sentiment figures on Friday.

Elsewhere, this morning’s eurozone wages figures shan’t move the needle for the ECB, who are set for a 25bp cut next Thursday in any case, while a deluge of speakers from the Fed, ECB, and BoE are unlikely to make many remarks of interest. Utterances from the Dallas Fed’s Logan on the balance sheet are likely to prove of most interest here.