All-time Highs!

Thoughts of the Day

All 3 of the major US stock indices (S&P500, Nasdaq, Dow Jones) closed at all-time highs on Friday. This is despite the geopolitical tensions in Middle East, the never-ending war in Ukraine, and the recent disappointing data on the inflation front.

The stocks are continuing to rally despite many investors thinking that the rise is overdone, the market is overbought and that hopes of a rate cut in March are waning. Can you imagine what the market will do when the Fed starts to cut interest rates?

This is an abridged version of our CIO’s daily writeup for the day, to view the full version, please login or subscribe to a membership plan.

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Week Ahead

Monday: –

Tuesday: The Bank of Japan is expected to keep interest rates at -0.1%.

Wednesday: The Bank of Canada is expected to keep interest rates at 5%.

Thursday:The European Central Bank is expected to keep interest rates at 4.5%.

Friday: The US PCE Price Index is expected to show that prices rose +2.6% Year-on-Year in December as it did in November.

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What Happened Yesterday

Market Movements as of New York Close 19 Jan 24 (21 Jan for Cryptos)
  • Fedspeak:
    Daly (current voter, slight hawk): “A lot of work left to do on bringing inflation back down to the Fed’s 2% target and it’s too early to think interest-rate cuts are around the corner.”
    (Daly is starting to sound more hawkish. She previously mentioned how high bond yields are equivalent to rate hikes.)
  • In January 2024, the University of Michigan reported a significant rise in US consumer sentiment, reaching 78.8, the highest it has been since July 2021. This was a substantial increase from December’s figure of 69.7 and surpassed the predicted level of 70, according to preliminary data. Additionally, the forecast for inflation over the next year decreased to 2.9%, marking the lowest point since December 2020, down from 3.1% in the prior month. The five-year inflation outlook also saw a slight decline, settling at 2.8% compared to the previous 2.9%.
  • The US Treasury Yield curve inversion widened to 0.24% as the US 2-year bond yield rose +0.05% to 4.39% while the 10-year yield rose +0.01% to 4.15%. 
  • The US stock futures traded within a range through the Asian trading session. However, it started to gain momentum during the London trading session with the S&P 500 futures up +0.22% before the New York session began.
  • The US stock market opened higher from Thursday. It then traded higher through the New York session on the back of better than expected UoM data. Consequently, the S&P 500 rose +1.23% on the day (high: +1.28%, low: +0.10%), the Dow Jones gained +1.05% (high: +1.24%, low: -0.05%) while the Nasdaq spiked +1.95% (high: +1.97%, low: +0.35%). The 3 indices are currently trading at all time highs. Tech stocks were led higher by chipmakers Nvidia (+4.17%) and AMD (7.11%).
  • The crypto market traded within a range over the weekend. Bitcoin is +0.66% higher while Ether is down -0.48% over the weekend.
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Headlines & Market Impact

China defies sanctions to make Russia its biggest oil supplier in 2023

Notable Snippet: Russia leapfrogged Saudi Arabia to become China’s top crude oil supplier in 2023, data showed on Saturday, as the world’s biggest crude importer defied Western sanctions to purchase vast quantities of discounted oil for its processing plants.

Russia shipped a record 107.02 million metric tons of crude oil to China last year, equivalent to 2.14 million barrels per day (bpd), the Chinese customs data showed, far more than other major oil exporters such as Saudi Arabia and Iraq.

Imports from Saudi Arabia, previously China’s largest supplier, fell 1.8% to 85.96 million tons, as the Middle East oil giant lost market share to cheaper Russian crude.

Shunned by many international buyers following Western sanctions over the Kremlin’s 2022 invasion of Ukraine, Russian crude oil traded at significant discounts to international benchmarks for much of last year amid a Western-imposed price cap.

Accelerating demand from Chinese and Indian refiners for the discounted oil boosted the price of Russian ESPO crude through 2023, pushing past the Group of Seven’s $60 a barrel price cap imposed in December 2022 as alternative shipping and insurance options to circumvent the sanctions proliferated.

Chinese refiners use intermediary traders to handle the shipping and insurance of Russian crude to avoid violating the Western sanctions.

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US consumer sentiment races to 2-1/2-year high; inflation expectations ease

Notable Snippet: U.S. consumer sentiment improved in January, hitting the highest level in 2-1/2 years amid growing optimism over the outlook for inflation and household incomes, which bodes well for the economy’s prospects this year.

The better-than-expected reading in sentiment reported by the University of Michigan on Friday reflected a brightening of moods across all age and income groups, education and geographical locations as well as political affiliation.

The University of Michigan’s preliminary reading on the overall index of consumer sentiment came in at 78.8 this month, the highest reading since July 2021, compared to 69.7 in December. Economists polled by Reuters had forecast a preliminary reading of 70.0.
It was the second straight monthly increase and occurred against the backdrop of a stock market rally, a fairly healthy labour market and gasoline prices that have held at lower levels.

The survey’s reading of one-year inflation expectations fell to 2.9% this month, the lowest level since December 2020. That was down from 3.1% in December and put these inflation expectations within the 2.3%-3.0% range observed in the two years prior to the COVID-19 pandemic.

The survey’s five-year inflation outlook slipped to 2.8% from 2.9% in the prior month. They are now in the 2.9%-3.1% range seen for 26 of the last 30 months, but slightly higher relative to the 2.2%-2.6% band that prevailed in the two years before the pandemic.

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Meta ramps up AI efforts by building chip arsenal, consolidating teams

Notable Snippet: Meta (META.O), CEO Mark Zuckerberg said on Thursday that the company was bringing its AI research team “closer together” with a more business-focused generative AI team launched last year, doubling down on a push to get the technology into products.

The social media giant was building out its infrastructure to accommodate the push and planned to have about 350,000 H100 GPUs (graphics processing units) from chip designer Nvidia (NVDA.O), opens new tab by the end of the year, Zuckerberg said in posts on Meta’s Instagram and Threads, opens new tab platforms.

In combination with equivalent chips from other suppliers, Meta will have about 600,000 total GPUs by the end of the year, he said.

That amount would make Meta’s system, once finished, among the largest in the technology industry. By contrast, Amazon (AMZN.O), last autumn said it was building out a system with 100,000 of its Trainium2 chips, while Oracle (ORCL.N), brought online a system with 32,000 Nvidia H100 GPUs.

A Meta spokesperson declined to specify which GPU suppliers the company was using aside from market leader Nvidia, though it has said publicly it also plans to use chips from AMD. Reuters has previously reported it has an internally designed GPU-like chip in the works, as well.

He also tied the AI investments back to the pivot to the AR/VR-driven metaverse vision that inspired him to change the company’s name to Meta in 2021, saying people would “need new devices” like glasses for interacting with AI.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord