Hazy outlook

US equity markets made a weak start to the year amid steadily rising bond yields, lifted by robust employment data.

Making matters worse, Trump’s inauguration and the fears that future economic policies could drive inflation triggered a wave of profit-taking. In contrast, European stocks rebounded in the wake of last year’s underperformance.

As stated, yields surged. The return on the US 10-year rose by almost 20 basis points to 4.78%. The German Bund similar gained 20 basis points to stand at 2.60%.

US hiring trends continue to beat forecasts

The US labour market continues to surprise on the upside, worrying market participants, who now fear that the Fed could call time on monetary easing. In December, the economy added 256,000 jobs, roaring past the consensus estimate of 165,000. The unemployment rate fell to 0.1 of a percentage point to 4.1%.

The inflation data release this week will therefore be particularly closely watched. Even now, the likelihood of a further rate cut at the Fed’s next monetary powwow is virtually nil.

The US economy is showing few signs of weakness – unlike the Eurozone, which is facing sluggish demand and borrowing costs still too high to encourage economic activity.

ECB is set to continue cutting interest rates

The ECB is likely to continue lowering interest rates. This is good news for European companies. However, the hazy outlook on the new Trump administration’s initial measures, most notably increases in customs duties on various types of goods imported from Europe, is dampening investor appetites for Eurozone stocks.

All in all, the S&P 500 lost 1.94% and the Nasdaq fell 2.24%. The EuroStoxx 600 gained 0.65% over the week. 

Gold rallied to USD 2,680 despite rising bond yields. It remains a core holding in current conditions.

Dominating this week will be the first earnings releases from US companies, with banks getting the ball rolling.