Apple Spurs Rally on Wall Street, Central Banks in Focus

Risk sentiment is cautiously optimistic ahead of a busy week for central banks and US earnings.

• Chinese economy shows signs of slowdown continuing, more support is expected
• USD falls, AUD rises ahead of RBA rate decision
• Oil trades 1% higher as geopolitical concerns and tight supply continue

After a large dose of volatility across the previous week, European markets are set to push higher on Monday, helped by a late rally on Wall Street on Friday. Whilst Europe ended last week in the red, a surge in demand for US stocks following strong results from Apple saw the Dow book its best daily performance so far this year. That positivity is helping Europe out of the blocks this morning, although plenty of risks remain.

Fear of the Fed acting too aggressively in 2022 to tame runaway inflation dragged on sentiment across most of last week. As did rising geopolitical fears with Russia amassing troops on the Ukraine border. 

Whilst these risks remain, encouraging US earnings following the dip in stocks has brought out some bargain hunters, helping to turn things around.

Chinese growth continues to slow

Today investors are shrugging off data showing that China’s economy continued to slow in January. Both manufacturing production and consumer spending took a hit at the start of the year amid tight restrictions to stem the spread of Omicron. 

The Chinese central bank has already taken steps to shore up the world’s second largest economy, cutting interest rates and promising additional measures if needed. The supportive stance of Beijing and expectations that policy easing measures could be stepped up in the coming months is helping keep risk sentiment elevated despite the softer numbers.

RBA rate decision

In the FX markets, the US dollar is starting the week on the back foot after surging to a 19-month high last week. Central bank meetings from Australia, the UK and Europe will give forex traders plenty to digest. 

First up is the RBA, which is due to announce its interest rate decision tonight. AUD/USD has traded back over 0.70 on RBA optimism after falling steeply on USD strength and the risk off mood last week. Whilst the Australian central bank is not expected to hike rates, policymakers are broadly expected to end QE. Given that the end of QE is already priced in, any shift in the RBA’s economic outlook could define the Australian dollar’s path over the coming days and weeks.

German inflation

The euro is also capitalising on US dollar weakness on Monday, picking up off 18-month lows and heading towards 1.12. However, gains could be short lived if eurozone GDP or German inflation slow more than forecast. German inflation is expected to ease back to 4.3% YoY in January, down from 5.3% in December. A slowing in inflation would take pressure off the already dovish ECB, widening central bank divergence, particularly with the Fed and BoE. This could hurt demand for the Euro versus its major peers.

Oil rises

Oil prices are pushing higher, building on gains from the previous week. Geopolitical tensions in eastern Europe and the middle east, in addition to already tight supply have sent oil prices to the highest level in 7 years. With OPEC+ expected to keep output levels unchanged at its meeting this week, combined with rising anxieties that geopolitical conflicts could disrupt output, plus falling inventory levels, the possibility of oil rising to $100 in the coming months is growing.