Va-va-voom

Quite what happened over the festive break is anyone’s guess, but market players have returned to their desks with some va-va-voom in the belly to send risk assets off to a flyer. Pin any explanation on the move you want, but the most popular appears to be the well-worn suggestion that inflation is cooling and so the Fed will be less aggressive in their approach to monetary policy than the all-in, wide-eyed hike-fest of 2022. So then, lots of buying and selling, although given the price action, a lot more buying. It feels though, a hollow rally, to which bear markets are prone. Stocks labelled ‘low quality’ have done well – see Peloton, Oatly and Coinbase for details – so too those whose valuations come wrapped in velvet. The narrative of slowing inflation is hard to challenge, the question of where it ends up perhaps harder to answer. Could it stop at 2% as those pulling the monetary strings hope, or does it plummet and go negative? One of the most unpopular positions for the year, though, might be for inflation to slow, then rip back. Whilst the market appears to think the Fed are all talk, a second inflationary wave either this year or next might scatter the pigeons. Oil has rattled back to levels that no longer interests the mainstream media, but that may not persist given depletion, exploration, and demand dynamics. See too Dr Copper, quietly breaking out on the chart. When stacked up against the lagged effect of last year’s rate hikes, the widening cracks in the housing market, and many leading economic indicators flashing red, the early flurry of the year has had surprising breadth but is likely based more on overly bearish sentiment and stale positioning and less, perhaps, on fundamentals that will get the party going full hog again. Reporting season kicks off this week. Reality may well beckon.