Marketmind: New year market funk sees 5-day blues

[January 08, 2024]  A look at the day ahead in U.S. and global markets from Mike Dolan

With U.S. government shutdown angst resurfacing, this weekend's Taiwan election in view, fourth-quarter earnings looming again and Boeing grounding aircraft after a mid-air blowout, Wall St's dour new year looks set to fail a hoary old five-day test.

Old investment almanacs posit that if the first five trading days of the S&P500's new year are net positive or negative, it predicts a gain or loss for the full 12 months. Hocus pocus or not, the 'five-day rule' has proven correct for five years running - despite unforeseen curve balls from 2020's pandemic and 2022's Ukraine invasion.

And unless the index rallies more than 1.5% later on Monday, those first five days will be in the red for 2024.

Those who dismiss such old 'rules' point out its fallibility - it missed marginally in four of the five years prior to 2019 - and lampoon the ease with which it works due to the fact Wall St has typically ended higher more often than not over the years.

Nevertheless, it has held true for 80% of the 64 years to 2014 - so not a great portent for 2024 for the superstitious.

Even though the S&P500 had its first daily gain of the year on Friday, futures are in the red again ahead of Monday's bell - with the latest robust U.S. jobs report doing little to reverse a dominant new year theme of caution on interest rate cut bets.
 

Another forecast-beating payrolls gain in December showed few signs of the sort of labor market cooling that might prompt the Federal Reserve to rush into easing credit this year.

Futures show less than a two-thirds chance the 135 basis points of rate cuts priced for 2024 will now start as soon as March and 10-year Treasury yields, though lower, remain above 4%.

Dallas Fed boss Lorie Logan on Saturday underlined that caution, warning rates could even be lifted again to offset any easier conditions in financial markets.

"If we don't maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we've made," she said.

"In light of the easing in financial conditions in recent months, we shouldn't take the possibility of another rate increase off the table just yet."

There were slivers of optimism, however, with Logan supporting moves to consider parameters that might see slowing of the Fed's balance sheet rundown as excess liquidity parked at the central banks' daily reverse repurchase facility tails off.

And despite tense geopolitics and Middle East strife since late last year, the New York Fed's global supply chain pressure index fell back into negative territory last month.

But there are other reasons to be anxious.

People walk around the Financial District near the New York Stock Exchange (NYSE) in New York, U.S., December 29, 2023. REUTERS/Eduardo Munoz/File Photo

Government shutdown jitters hove back into view as Congress reconvenes. Even though weekend agreements been top Democrats and Republicans on a $1.59 trillion spending deal offered some optimism, it set up a race for divided lawmakers to pass the bills to appropriate the money before government operations are forced to shut later this month.

They face a Jan. 19 deadline for the first set of bills to move through Congress and a Feb. 2 deadline for the remainder.

The fourth-quarter U.S. corporate earnings season gets underway later this week too, with the big banks kicking in on Friday. The sector's expected annual profit growth of 8.4% is forecast to outpace an overall 5.2% gain for S&P500 firms.

Blue chips got an unexpected jolt at the weekend, however. Boeing shares listed in Frankfurt fell as much as 8% on Monday after the U.S. Federal Aviation Administration ordered the temporary grounding of some Boeing 737 MAX 9 jets fitted with a panel that blew off a jet in midair on Friday.

But perhaps the most anxious backdrop surrounds the upcoming Taiwan elections.

China's blue-chip index fell almost 1% to its lowest level in nearly five years, while Hong Kong stocks shed roughly 2% amid rising geopolitical tensions and domestic economic worries that saw tech shares there take a new battering.

China will conduct live firing drills in the East China Sea on Monday and Tuesday, according to the China maritime safety administration.

Taiwan's defence ministry, meantime, said it detected three more Chinese balloons flying over the Taiwan Strait on Sunday, accusing China of threatening aviation safety and waging psychological warfare days before the elections.

China's foreign ministry said the country will sanction five U.S. military manufacturers in response to the latest round of U.S. arms sales to Taiwan.

In more positive news, U.S. chipmaker Nvidia said it plans to begin mass production in the second quarter of 2024 of an artificial intelligence chip it designed for China to comply with U.S. export rules.

Key diary items that may provide direction to U.S. markets later on Monday:

* U.S. Dec employment trends, U.S. Nov consumer credit

* Atlanta Federal Reserve President Raphael Bostic speaks

* U.S. Treasury auctions 3-, 6-month bills

(By Mike Dolan, editing by Ed Osmond, [e-mail])

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