2023.02.05 Weekly Note

A very questionable rally

12 min readFeb 6


Something that took me by surprise last week was the very large MOC for the January-month-end on Tuesday, especially ahead of the FOMC decision and NFP that could very well swing the trend in the stock market rally. This got me looking:

  • We saw 2 major bear market rallies last year off the mid-June and October lows and where the cumulative MOC imbalances for each quarter looks to have supported the move. For January however, MOC’s have been flat to negative up until the large month-end buying.
  • Breaking down MOC activity into monthly segments, we can observe that it has broadly lined up with SPX returns, but for January, the back-end in particular, it has not.

We’ve also seeing some whacky price action around the big events of late and last week was no exception:

Some bumps around the initial rate decision but what was more interesting was seeing stocks ripping even before Powell started speaking! Then came NFP which put in a monster beat, doubling the amount of jobs expected where equities really should have joined bonds in the sell-off on the report, but it bounced right out of the open before collapsing in the afternoon. Not much sense can be made of these moves other than the possibility of being driven by 0dte options activity — Charlie McElligott offers some good insights on this in his interview with Kevin Muir on the recent Market Huddle podcast.

A questionable rally? Yes. 0dte’s to blame? Very possibly.

Finally, Labour market data continues to be strong, increasing the odds of a soft-landing. I made the point above that equities should have sold off on the strong jobs report, which it didn’t having only given up the day’s gains by the close. Employment trends have been relatively robust, jobless claims have been trending lower in recent months, job vacancies continue to beat expectations and unemployment creeps lower to its 54-year low sending the Beveridge curve (unemployment to vacancies ratio) even higher. This would imply the Fed sees underlying inflation pressures to persist, and the more the soft-landing becomes a reality, the greater the reflationary risks that the Fed is likely to fight down the road and therefore less likely to pivot any time soon.

Markets have got way too doved-up, too soon.



  • Federal Reserve shifts to quarter-point rate rise but warns of more to come — Markets rally as traders focus on smattering of dovish notes from chair Jay Powell (FT). Here’s what changed in the new Fed statement (CNBC). US Jobless Claims Edged Down Last Week (WSJ). Jobs report shows increase of 517,000 in January, crushing estimates, as unemployment rate hit 53-year low (CNBC). Restaurant, Healthcare Jobs Led January Hiring Surge (WSJ). Investors pile into market rally as economic slowdown risk ebbs — Improving outlook boosts demand for riskier assets as ‘fear of missing out’ returns (FT). US stocks jump after Fed announces smaller rate rise — Investors emboldened after central bank chair says focus is ‘not on short-term moves’ in markets (FT). US stocks and bonds fall after blockbuster jobs report — Equities gain on the week but investors reassess interest rate outlook after unexpected labour market acceleration (FT). Dollar Rebound Set to Extend Amid Fed Speakers, China Tensions — Fed officials may reinforce higher for longer rates theme, Bearish greenback positions look stretched (BBG).
  • Upbeat Economic Data Keep Investors on Edge About Fed — After a strong jobs report, traders are betting the Fed might raise interest rates two more times this year (WSJ). Labour market’s resilience leads to bond sell-off as investors reassess Fed’s interest rate stance (FT). Economists worry that the Fed thinks inflation and job market are joined at the hip — Some worry that a strong U.S. labor market will lead to unnecessary interest rate rises (MW). Jobs Galore Give US Consumers Firepower to Fight Off Recession (BBG). States Are Flush With Cash, Which Could Soften a Possible Recession — Rapid recovery, federal stimulus leave state finances in historically strong shape (WSJ).
  • Morgan Stanley’s Mike Wilson warns there’s a group of stocks that are riskier than growth shares — Cyclicals more risky now than Growth — “There’s this sort of narrative that China is reopening, inflation has peaked, [and] we can look through the valley here and start buying early cyclical stocks. That’s a real mistake given the degradation in earnings that we think is coming.” (CNBC). Apple posts first revenue fall in three and a half years — Sales of iPhone hit by Covid supply chain disruptions in China but company avoids mass lay-offs (FT). Amazon posts solid sales but softer cloud growth — warns of ‘uncertain environment’ as economic worries prompt budget cutbacks (FT). Meta shares soar on resilient revenue and $40bn in buybacks — Zuckerberg promises ‘year of efficiency’ as parent of Facebook, Instagram and WhatsApp looks to contain costs (FT). Meta follows Chevron with a huge buyback that likely signals more are to come (CNBC). Elon Musk Says Twitter Is Headed for ‘Breakeven’ After He Saved It (Barrons). Electric vehicles defy price war after Ford and Tesla discounts — GM, Volkswagen, Hyundai and Kia decline to follow competitors as customer demand persists (FT). Prices of some Tesla models cut in South Korea -official (RTS). Tesla sales of China-made electric vehicles up 18% in January (RTS). Banks Borrow Unsecured Cash at Record Clip While Deposits Flee — Deposits at U.S. lenders fell in two consecutive quarters last year for the first time in over a decade (WSJ). Corporate America is divided on odds of US recession — Mixed signals on interest rates, jobs and consumer spending cloud the business outlook (FT).
  • Biden’s State of the Union Address Holds a Chance for a Fresh Start — The president plans to use his first State of the Union address since Republicans took control of the House to call for bipartisan cooperation. Neither he nor many others expect that to happen (NYT). Biden-McCarthy meeting yields no debt ceiling deal, but speaker says markets should be encouraged (CNBC). White House likely to tap Brainard, Bernstein as top economic advisors, sources say (CNBC).


  • ECB Raises Interest Rate by Half Percentage Point (WSJ). ECB set to raise rates again in May, policymakers say (RTS). Euro zone inflation seen just above ECB’s target in 2025, poll shows (RTS). Sticky underlying inflation set to keep ECB on its toes (RTS). Fed and ECB diverge as Lagarde tackles ‘alive and kicking’ inflation — European Central Bank president points to several reasons why price pressures will take longer to tame (FT). Euro zone economy posts surprise expansion in the fourth quarter, curbing recession fears (CNBC). The EU will struggle to de-risk its trade with China — Brussels doesn’t yet have the tools or the strategy to fine-tune economic disengagement (FT).
  • Bank of England raises interest rates by 0.5 percentage points to 4% — Central bank indicates rates may have peaked and now predicts milder recession than before (FT).Bank of England Signals Worst Years for Growth Since Great Depression (BBG). UK expected to be only major economy to shrink in 2023 — IMF (BBC). House prices fall for fifth month in a row (BBC). Cost of fixed-rate mortgages set to fall as UK inflation outlook brightens — Brokers are predicting that a five-year deal below 4 per cent is coming (FT). UK Mortgages Set for Slowest Year Since 2011 as House Prices Dip — High interest rates and living cost crisis will cut demand: EY, Bank lending to businesses expected to drop as growth stutters (BBG). NHS staff in Wales call off strike after Cardiff boosts pay offer (FT). Teachers’ strike lays bare the heartbreaking plight of schools (FT). Sunak says UK cannot afford ‘massive’ pay rises for nurses (FT). British Steel censured over 800 job cuts plan amid state aid talks — Business minister says UK government has put forward ‘generous’ £300mn package (FT). UK’s shortest-serving PM Liz Truss blames economic ‘orthodoxy’ for downfall (RTS). Breakdown of gas storage talks leaves UK exposed to price surges, say experts — Impasse over subsidies increases country’s dependence on expensive LNG imports (FT).
  • Fierce fighting in north of Ukraine’s Bakhmut, says Russian head of Wagner militia (RTS). Ukraine will fight to hold ‘fortress’ Bakhmut as long as it can — Zelenskiy (RTS). Ukraine prepares for renewed Russian offensive (FT). Ukraine to replace defence minister in first major reshuffle since invasion (FT). US set to give Ukraine longer-range smart bombs — Latest weapons will double the current strike range in latest batch of assistance from Washington to Kyiv (FT). Russia’s Medvedev says more U.S. weapons supplies mean ‘all of Ukraine will burn’ (FT). Kyiv presses criminal charges against Wagner group chief; Germany announces more tanks for Ukraine (CNBC). Germany asks Sweden for launchers to boost IRIS-T air defences for Ukraine: Spiegel (RTS). Portugal to send Leopard tanks to Ukraine, PM says (RTS).


  • India’s Adani Is Not China Evergrande. It’s Worse (BBG). Adani crisis ignites Indian contagion fears, credit warnings — ratings agency Moody’s warning the conglomerate may struggle to raise capital and S&P cutting the outlook on two of its businesses (RTS). Adani losses top $100 billion in the wake of Hindenburg Research report (CNBC). Some of Wall Street’s biggest names are exposed to the Adani Enterprises plunge (CNBC). Adani Flagship Shelves $122 Million Bond Plan After Market Rout (BBG).
  • The Year’s Emerging-Market Rally Is Already in Danger of Slowing — Goldman Sachs warns against indiscriminate buying in risky EM, Rally in developing stocks, currencies shows hints of a pause (BBG). Taiwan’s Dollar Is Latest Emerging-Market Domino Lined Up to Wobble — Currency nears 7-month high on inflows, emerging-markets rally, Economic outlook, chip downcycle to weigh on island’s dollar (BBG). Foreign Investors Buy Taiwan Stocks at Fastest Pace Since 2005 (BBG). Foxconn’s January sales surge as China COVID disruption shaken off (RTS).
  • China Developers Flag Worst Earnings in Years on Historic Slump — About 60% of mainland-listed firms expect losses for last year, Warnings signal grim reporting season for real estate industry (BBG). China’s real estate crisis isn’t over yet, IMF says — “Authorities’ recent policy measures are welcome, but in our view additional action will be needed in order to end the real estate crisis”(CNBC). China Banks Offer Cheap Consumer Loans as Xi Urges More Spending — Bank of China, Construction Bank offer preferantial loan rates, China President Xi has called for expanding consumer demand (BBG).
  • China Jan services activity expands for first time in five months — Caixin PMI (RTS). China to fully resume travel with Hong Kong, Macau on Feb 6 (RTS). China hotel, catering job openings surge on post-COVID demand recovery -survey (RTS). Optimism on Chinese stocks soars to five-year highs (CNBC). Morgan Stanley Wins China Fund Control as Competition Heats Up — Approval comes after Manulife, JPMorgan’s acquisitions cleared, Regulators have quickened approvals since end of last year (BBG). Standard Chartered says wins nod from China for securities firm (RTS). Watch Out, China Inc. Is Going Global. Again — Chinese companies are raising capital in Europe as they look to expand production bases there. It’s an astute move (BBG).
  • Antony Blinken cancels China trip following discovery of spy balloon — US secretary of state calls it ‘irresponsible act’ as Beijing denies espionage claims and insists it is ‘civilian airship’ (FT). U.S. military shoots down suspected Chinese surveillance balloon (CNBC). China defense ministry: U.S. ‘attack’ of Chinese airship an ‘overreaction’ (CNBC). US Moves to Recover Chinese Balloon While Weighing Retaliation — Questions emerge on whether balloon payload used US technology, Blinken may take delayed China trip, bringing tougher message (BBG). China Weather Bureau Shake-Up Draws Scrutiny After Balloon Furor — Official removed just after US said balloon was over country, Beijing said the device was collecting weather information (BBG).
  • Australia Set to Push Rates to 10-Year High as Prices Spiral — Policymakers weigh jump in core prices vs cooler retail, jobs, Lowe had rare chance to observe Fed before RBA’s rate meeting (BBG). Australian Inflation to Slow to About 4% by December, AMP Says — AMP warns against further rate hikes that may slow the economy, Central bank is expected to raise rates to 3.35% on Tuesday (BBG). Australia, China Trade Ministers Hold First Talks Since 2019 — Australia expected to raise China’s sanctions on exports, Chinese companies reportedly restarting Australia coal imports (BBG).


MSCI World indices are hinting struggles above the 50fib retracement level.

As with the World ex-US index, Developed and Emerging market indices are already showing hints of a turn in trend.

European equities defied potential signs of exhaustion the previous week rallying closer to the highs riding on the positive economic data despite the ECB hiking and on course for more rate hikes — Final PMI’s mostly saw upward revisions and Eurozone GDP saw a surprise expansion last quarter.

China equities printed a strong rejection of the 50fib level last week that has been further complemented by a gap lower today (as I write this coming out of the Asia Monday session).

US indices rejected a key pivot area last week where a lower low and close would in my view confirm the trend change.

The index of the most-shorted stocks has also put in a rejection of a key pivot area with a bearish inside bar printed last Friday.

Looking at cyclicals — Dow Transports and Homebuilders vs REITs ratio printed strong gains after, much like European equities in the prior week, defied early signs of the rally slowing. However …

growth/reflation sectors Materials and Industrials have underperformed for another consecutive week, and Mike Wilson has flagged Cyclicals as being more risky than Growth stocks:

As seen in the Europe XLB and XLI charts above, the action in cyclical assets is looking stretched and deserves close attention this week for confirmation on a broader trend change.


Also on theme with concerns of the overextended cyclical rally, BBG commodities index has rolled over back to YTD lows.

Energy is trading heavily which is not what you’d expect from seeing a rally in cyclical stocks. Crude has failed to hold the break in recent weeks, and NatGas prices continues to plummet, the latter of which seems to be getting plenty of attention on fintwit attempting to buy into this crash which was not without reason — producers aggressively ramped up production late last year anticipating strong European demand, but winter has turned out to be much shorter than anticipated leaving the market oversupplied. Furthermore, now that Europe has amply worked up contingencies while averting a harsh-winter induced recession, their focus is on a green-powered future which is reported to be affecting demand for Henry Hub gas.

Gold has long looked overextended with price being driven by ‘Colossal’ central bank buying drives gold demand to decade high. It has broken down giving up $100 virtually in one move coinciding with the rebound in the US rates and dollar. As long as that remains the case, I think it will continue it’s reversion towards the 1800 handle.


Wk/wk change in the US rates shows the biggest moves at the front-end of the curve, and across the TIPs curve.

Bond volatility index has been drifting lower even as Treasuries is beginning to see renewed selling pressure in recent weeks. It has ticked up slightly coming into Feb and given the hardened case for a soft-landing and higher-for-longer rates, I would expect that to continue which would spell a bigger USD rebound and sell-off in Gold and Equities.


  • lower-beta EUR CHF and USD are showing strength
  • higher-beta GBP AUD and NZD are showing weakness
  • CAD is appearing to mirror the USD, and JPY trading heavy where I would expect it to trade lower as recession fears dim and upward pressure in global rates remains.

Holding a general risk-off bias, I expect the low-beta’s to outperform this week, particularly USD where we have a lot of fed speakers on the calendar that is likely to put in a much stronger message than Powell has done last week.

If you have some differing views and thoughts on the market, feel free to reach out — have a great week trading!

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