The Overnight Report: Momentum’s Gone

By Rudi Filapek-Vandyck

The mantra used to be it's our dollar, but it's your problem. Since last year the world of finance is witnessing a new variant on the theme: it's your recession, not our problem.

Australia is facing a noticeable slow-down in economic activity this year, thanks to RBA and global tightening, but very few forecasters have negative GDP growth penciled in their outlook.

Things are decidedly different for numerous economies elsewhere with central bankers and economists debating the timing and severity of a most likely economic recession.

Witness the divergence in equity market performances between the former champion of the world, Wall Street, and Australia/Europe/Emerging Markets. In 2023, it seems, investors are all too happy to keep the distinction going.

Turning to price action overnight, it is amazing how quickly momentum can reverse: just ask Thanassi who'll be contemplating today, and the next few days, exactly what happened after that positive start. US equities enjoyed their best start to the new calendar year since ages but questions are being asked how much of those gains will prove sustainable, at least in the short term.

Identifying one culprit almost seems unfair. One day it's the bond market, cheered on by Fed representatives, the next day it's all about weak economic signals. Overnight the attention turned to corporate results. It simply wasn't good enough. Procter & Gamble Company (NYSE:PG) reported shrinking sales volume. Alcoa Corp (NYSE:AA) guided towards weaker-than-anticipated aluminum shipments. Discover Financial Services (NYSE:DFS) sank after the credit-card company warned write-off rates may double this year.

Not helping general sentiment, the US hit its federal debt limit and the Treasury Department began the use of special measures to avoid defaulting on any payments. We all know there's a small cabal inside the Republican party who'd like to make a big issue about this matter, and they probably will.

Returning to the Australian Open; small things matter. Sometimes a whole lot. The Grand Debate among US forecasters is now whether the Federal Reserve has two or three more rate hikes by 25bp each up its sleeves. Pick your pick. The sun will definitely rise again tomorrow.

Overnight data showed new US home construction declined for the fourth straight consecutive month in December.

Unlike the US, European inflation is not showing any signs of possibly having peaked. Ergo, the ECB is signalling a different outlook. Inflation cannot be left running amok.

Commodities remain supported, despite all talk about the upcoming US recession. China re-opening remains the theme du jour, also feeding into a small renaissance for crude oil momentum. European gas prices declined amid ample inventories and strong LNG imports. North Asian LNG prices were steady. Iron ore keeps feeding off the same positive sentiment.

US indices stuck with the reversal in momentum last night, but being down more than -1% during the session, saw bargain hunters step in and losses reduced, only to see those losses widen again by the close of trade. Losses ranged between -0.76% for both the Dow and the S&P500 and -0.96% for the Nasdaq.

Local SPI futures suggest indecision and ongoing willingness to dance to our own tune in Australia. Since it's Friday, that might yet prove a little optimistic come late afternoon.

"The Overnight Report: Momentum’s Gone" was originally published on FNArena.com and was republished with permission.