HomeContributorsFundamental AnalysisOptimism Fizzles Out, Focus on Earnings

Optimism Fizzles Out, Focus on Earnings

European stocks kick off the week on last week’s positive vibes, adding more gains to their best ever start to a year.

But sentiment in Asia was mixed; futures point at bearish start.

On the data front, China grew 3%, well below the government’s 5.5% target last year, but the Q4 rebound was well above market expectations. Retail sales contracted significantly less than expected as well, while unemployment unexpectedly fell.

Could the European stock rally extend? 

The DAX extended its advance above the 15000 mark, to the fresh highs since before the war in Ukraine started.

And the French CAC40 took over the 7000 resistance, and is only around 4% below the 2022 peak.

The recovery in European stocks is impressive, and coincides with the rebound of the euro against the US dollar since end of September – which makes the energy and raw material costs more affordable for European companies, and boosted by a mild start to the winter, which gave a broad comfort to the Europeans that the energy shortage will certainly not be on this winter’s agenda.

Could the European stock rally persist? It depends.

We expect a further recovery in the EURUSD throughout this year, but the looming interest rate hikes in Europe, and the base-case scenario that energy and raw material costs will rally – due to the Chinese reopening, hint that the recovery could meet some obstacles along the way.

And the rally in material costs is also not a given, as fear of global recession could also hinder rally at this end. In this sense, we see that oil prices have hard time picking up upside momentum since the China reopening news. The barrel of US crude is now above the 50-DMA for the third day, but appetite above the $80 level is decidedly limited.

Copper futures also took a 2% dive yesterday, as recession was the major topic in WEF.

Anyway, recession expectations – per se – are not bad news for the markets. Decline in profit expectations, as a result of recession, is. So, all eyes are on corporate earnings!

In the FX 

The US dollar was better bid yesterday, but the price recoveries in the dollar could be interesting opportunities to sell the tops, as the dollar is set to give back last year’s gains against most majors, due to the softening Fed expectations, that come along with the recession worries.

The dollar-yen, where some interesting FX action is expected to happen this week, is steady-ish around the 128 mark, with JPY bulls waiting in ambush to push the pair lower in case we hear a hawkish development from the Bank of Japan (BoJ) due tomorrow.

Elsewhere, the Canadian inflation – due today, is expected to have eased 0.5% month-on-month in December. A soft inflation read could weigh on the Loonie in the shorter run, but the USDCAD should continue trending lower on the back of a broadly softer US dollar, and a potential recovery in oil prices.

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