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Investors Becoming Cautious; Focus on Earnings & Rate Decisions

Olusegun Enujowo


Wall Street and European stocks are trading lower at the start of the week as investors become more cautious ahead of a busy week of more corporate reports, economic data and, most importantly, upcoming interest rate decisions on both sides of the Atlantic.

Despite mixed earnings reports and profit warnings from some of Wall Street's biggest companies, the historic year-opening rally continued last week, pushing U.S. stocks deep into overbought territory. The Nasdaq 100 is on track for its best January performance since 1999 - but the final two days of January could see profit-taking ahead of interest rate decisions and statements from the Fed (Wednesday) and the ECB and BoE (both on Thursday).

I expect a clear statement from the ECB that it remains on track for more rapid rate hikes and will likely raise rates by a total of 100 basis points in its next two rate decisions before moving to a 25 basis point hike in May. The Bank of England will also raise rates by 50 basis points, but is likely positioning itself less hawkish than the ECB given the economic slowdown in the UK. Investors may be surprised by hawkish comments from Fed Chairman Jerome Powell, who will try to push back expectations that the Fed will stop raising rates soon and ease monetary policy toward the end of the year.

A surprise slowdown in the German economy in the fourth quarter is also weighing on market sentiment in Europe and European equities. I expect further signs of slowing earnings and prolonged monetary tightening to weigh on the current positive market sentiment despite optimism about China reopening. I also see hedge funds shifting positions toward a coming sell-off after the markets' recent strong gains - another sign that we are correct in our analysis of overbought and overoptimistic investors.

Oil prices were little changed, but then, commodities under slight pressure due to the stronger USD and deteriorating risk sentiment. Precious metals will remain stable and benefit from higher safe haven demand, not minding current retracements on the charts. Industrial metals continue to see increased demand from China.

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