Dollar & Stocks Rally after Strong NFP

Equities

In a recent turn of events, the performance of major US stock indices, notably the S&P 500, has taken investors by surprise with its robust growth. At the beginning of 2024, the S&P 500 surged to a record high in January, marking a 4% increase this year, following a substantial 24% climb in 2023. This surge was initially fuelled by the anticipation of the Federal Reserve cutting rates. A remarkable US employment report indicating that nonfarm payrolls increased by 353,000 jobs last month, far exceeded expectations.

The US market saw significant movements with shares of Meta Platforms and Amazon soaring by 20% and 8%, respectively, after reporting robust earnings. Such gains contributed to the S&P 500 hitting new highs.

The anticipation of nearly 10% growth in S&P 500 earnings for 2024, as per LSEG data, alongside upcoming earnings reports from major companies such as Eli Lilly, Walt Disney, and ConocoPhillips, will test the resilience of this optimism.

The FTSE 100 experienced a slight dip, closing 0.1% lower on Friday, while the mid-cap FTSE 250 saw a modest increase of 0.2%. Both indices registered weekly losses amidst a backdrop of stronger-than-expected US jobs data, which propelled the dollar and yields upwards, adversely affecting commodity stocks.

BP's shares fell by 1.5% following the shutdown of its Whiting, Indiana refinery, reflecting the direct impact of business activities on stock performance. In the airline sector, Wizz Air stood out with a 10.3% jump in its stock price after reporting a 14.2% increase in passenger traffic for January, highlighting the influence of operational updates on stock valuations.

Forex & Commodities

The US dollar reached an eight-week peak against major currencies, bolstered by revised market expectations that the Federal Reserve might not lower interest rates as soon as previously anticipated.

This adjustment in outlook followed a particularly strong US jobs report, which exceeded analysts' forecasts, and remarks from Fed Chair Jerome Powell suggesting a cautious approach to rate cuts. Consequently, the yen, along with the Australian and New Zealand dollars, dropped to two-month lows, and the euro dipped to a more than one-month low of $1.07675, later stabilising around $1.0782. The sterling also experienced a decline, reaching its lowest point since January 17 at $1.25985 before slightly recovering.

This recalibration of expectations regarding the Fed's monetary policy has led to a decrease in bets for aggressive rate cuts, with traders now anticipating significantly less easing than before. Future markets have adjusted to reflect a less than 20% probability of a rate cut by March, a sharp decrease from previous estimations.

In the commodities market, gold prices fell as the surging dollar and Treasury yields, stimulated by the robust jobs data, dampened prospects for early rate reductions by the Fed. Spot gold decreased by 0.5% to $2,029.03 per ounce, while US gold futures saw a 0.4% drop. This decline in gold prices is in line with the reduction in speculative long positions for the fourth consecutive week, indicating a cautious stance among investors regarding the precious metal's near-term prospects.

Oil prices, on the other hand, experienced a modest recovery from the previous week's declines, with Brent crude futures and US West Texas Intermediate futures both registering slight gains.