Risk Rally Rolls On

WHERE WE STAND – A generally risk-positive day on Wednesday, as equities worldwide continued to ride on the wave of Tuesday’s US AI investment announcement, as well as blowout earnings from streaming giant Netflix.

As a result, it wasn’t surprising to see the Nasdaq 100 leading the way higher on Wall Street, while the S&P hit fresh intraday record highs, and even European equities continued to find some love. The pan-continental Stoxx 600 notched a record high, while the FTSE 100 and DAX 40 remain at their own all-time highs, and even France’s CAC 40 has climbed to its best levels since the middle of last year. Another example, then, if one were needed, of how the stock market is not reflective of broader economic conditions.

Clearly, the path of least resistance continues to lead to the upside in the equity space, with participants ably shrugging off tariff-related uncertainties for now. This seems a rational stance to take, given that President Trump likely views said measures as a negotiating tactic, and that Trump is unlikely to want to kibosh the equity rally, when he views Wall Street’s performance as a gauge of his own success, or otherwise.

That said, next week brings a chunky slate of event risk, including the first FOMC decision of the year, as well as earnings from megacaps such as TSLA, MSFT, META and AAPL. It wouldn’t be too surprising to see some equity longs trimmed into that bonanza, especially with the potential 1^st February date for Canada/Mexico tariffs in the mix as well.

Besides the equity rally, Wednesday was relatively quiet – albeit, these days, I’m loath to use that ‘Q’ word for fear of tempting fate.

Anyway, those subdued conditions saw Treasuries trading just a touch softer on the day, with weakness led by the belly, while the USD also traded in relatively quiet fashion, within a handful of points either side of the 108 figure. Participants’ overall bias, though, likely remains in favour of being long USD as we wait, patiently or otherwise, for some tariff clarity.

Fundamental drivers, more broadly, yesterday, were rather lacking, with the data docket barren, though the latest UK borrowing figures did point to a much wider budget deficit in December than had been expected, largely due to a rise in debt servicing costs. We were also treated to some more drivel from Chancellor Reeves, claiming that the “UK’s public finances are now in order”.

On a serious note, it is examples like these which point to the degree of difficulty that the UK is in. While almost all of the Treasury’s fiscal headroom has been eroded, inflation is stubbornly high, and growth non-existent, the Chancellor is strutting round Davos pretending that all is ‘tickety-boo’. It’s not particularly difficult to see why financial markets have lost confidence in policymakers’ ability to get a grip of the fragile fiscal backdrop, and further pain looks to be on the cards for both the GBP, and Gilts.

LOOK AHEAD – A busy couple of trading session await.

Two central bank decisions, firstly, will be in focus over the next 24 hours. Kicking things off this morning will be the Norges Bank, set to hold rates steady at 4.50%, though participants will interrogate the NB’s guidance, as to whether the previously flagged March 2025 rate cut remains on the cards. Much later on, in the early hours of Friday, the Bank of Japan are set to hike 25bp, doubling the target rate to 0.50%, in keeping with the deluge of sources reports received over the last week or so. Here, again, guidance will be in focus, particularly the extent of further policy tightening that could be on the table.

On the data front, the weekly US jobless claims figures are due, with the initial claims print coinciding with the survey week for the January labour market report, due 7^th February. Canadian retail sales, and eurozone consumer confidence, figures are also out this afternoon.

Lastly, President Trump is set to address the World Economic Forum in Davos, while notable earnings today come from GE, American Airlines, and Texas Instruments, among others.