Rise and shine everyone.

There’s a lot going on for a Monday morning!

Markets are still feeling the pressure of higher rates, and it should come as no surprise if the 10Y yield hits 5%. There has been net selling in the market over the past few days, and we’re in a blackout period for stock buybacks because of earnings season. GS says that a lot of vol supply is anticipated in the coming week, which also makes sense given we’re starting earnings season.

Fed Funds Futures are now pricing in 0.2437% of cuts, which is barely even one cut.

With expectations of rate cuts coming in lower, the USD hit a fresh high and currencies across the globe are struggling. In China, the PBOC raised the cross-border macro adjustment parameter for the first time since July 2023 to support the Yuan, pledged stronger FX market management, and reaffirmed its goal of maintaining a “reasonable equilibrium” for the currency. Meanwhile, the Australian Dollar hit its lowest level against the USD since April 2020 after an early rebound driven by rising 10-year yields. The Euro also fell to $1.02, its weakest since November 2022, following comments from the ECB’s Philip Lane signaling further monetary easing. The Indian Rupee hit record lows of 86.35 as the Reserve Bank of India intervened by selling dollars to curb depreciation. Only the Japanese Yen gained after reports that the Bank of Japan is considering a rate hike at its January 24th meeting and revising its core-core inflation outlook for FY24 and FY25.

While we’re seeing some tempering of expectations with regard to earnings this season, we still expect a relatively solid delivery particularly from the Mag 7.

In other news, China’s trade surplus surged to a record $992 billion last year as exporters sought to offset weak domestic demand and prepare for potential trade challenges with Donald Trump’s return to the White House. Meanwhile, Apple faced headwinds, selling 5% fewer iPhones globally last quarter and losing market share to Chinese rivals. The iPhone’s share slipped by one point to 18% in 2024, according to Counterpoint Research, reflecting challenges in its largest market outside the US.

Finally, Oil surged to a five-month high, with Brent crude reaching its highest level since late August, as tighter U.S. sanctions on Russian oil exports raised concerns about supply disruptions to major importers like China and India. Citi analysts called the sanctions package unprecedented, noting it could impact up to 30% of Russia’s shadow tanker fleet. The rally has amplified inflationary fears, even as easing weather conditions in Europe could temper natural gas prices, though two NatGas companies linked to Dutch TTF pricing may still exert upward pressure.

Chart of the Day - GS warns of further downward pressure

“Funding spreads rise when demand for funding long exposure through futures/swaps/options increases faster than supply. Supply of funding from one-day to the next is generally slow moving as banks and other liquidity providers adjust policies to adapt to market conditions and capital requirements. In our experience, large short-term moves in funding almost always mean that there has been a change in demand trends from professional investors. We believe that pension funds, asset managers, hedge funds and CTAs have all been net sellers over the past few weeks. Given the timing of the selling pressure (it began a few days before the FOMC), investors may be positioning for less dovish interest rate policy over the coming meetings. For perspective, the last time funding spreads were at this level (15-Aug), the SPX was 5% lower. We continue to see this episode as similar to Dec 2021 when funding spreads lead the decline in the SPX by 5 weeks.”

What we’re watching this week

• Start of earnings season on Wed 15 with the banks (earnings calendar below)

• CPI on Wed 15, PPI on Tue 14

• JPM Healthcare Conference - Mon 13 to Thu 16

• ICR (Consumer & Retail) Conference - Mon 13 to Wed 15

• Trump Staffing Confirmations - Tue 14 to Thu 16 (Bessent on Thu)

• China 4Q GDP on Thu 16 night

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)