It is a sea of green in the European equity space and futures contracts are pointing to a stronger open for US stocks on Thursday. The global bond market is also stable, and after selling off post this morning’s GDP data, the pound is back above $1.22 vs, the USD. The price action on Thursday tell us that inflation data is key for market sentiment right now. If the disinflation process remains in place in Europe and the US, then it supports further interest rate cuts in 2025. There are threats to inflation down the road, but they are concerns for another day. For now, stocks are playing catch up, bonds remain stable and the weakening in the dollar in recent days has helped to boost risk sentiment.

Interest rate cut hopes fuel market recovery

The market is increasing its bets that central banks will cut interest rates. The interest rate futures market now expects nearly 2.5 rate cuts from the BOE, earlier this week that was less than one. The market now expects UK interest rates to end 2025 at 4.11%, this had been 4.42% earlier this week. In the aftermath of the softer inflation data and the subdued November GDP reading, the market is moving closer towards the BOE’s expectation of four rate cuts for this year. The BOE meeting next month could see the market come back into alignment with the BOE when it comes to rate cuts for this year.

There has also been a boost to rate cut expectations in the US. The market continues to expect one rate cut from the Fed this year, but they expect US interest rates to end the year below the 4% handle, which is also boosting risk sentiment in the second half of this week. Blue chip US stock markets had a stellar performance on Wednesday, however, the mid cap indices outperformed the blue chips, the Russell 2000 was higher by nearly 2%, as weaker inflation boosted rate cut hopes. This has helped the equal weighted S&P 500 outperform the market cap weighted S&P 500.

TSMC proves that the AI bubble is showing no signs of popping yet

Earnings data is also helping sentiment. US banks reported a robust performance on Wednesday. On Thursday, the good news on earnings has continued. Taiwanese chip maker TSMC projected quarterly sales and capex spending ahead of analyst expectations. It expects revenues of $25bn-25.8bn, and for capex and tech spending to be $38bn-42bn in the first three months of the year. This suggests that the AI investment cycle is likely to continue. This upbeat outlook has calmed some gears around a US/ China trade spat once President Trump takes office next week. Chipmakers still face uncertainties this year. There are concerns that AI is in a bubble, and consumer electronics, which is also an important market for chip makers, could be slowing down after reports that Apple sales slipped in China at the end of 2024. Although there are issues ahead for chipmakers, TSMC’ s update has boosted sentiment towards AI stocks, and Nvidia’s stock price is higher by more than 1% in the pre-market, which should support the overall index.  

Luxury gets its mojo back

In Europe, the Cac 40 is leading the way after Richemont, the owner of Cartier, reported extremely strong sales, which has boosted hopes of a general recovery in the luxury sector. Richemont sales jumped 10% during the important Christmas season, due to strong demand in Europe and the US, which was mostly focused on jewelry, while watch sales remained weak. Asia, which has been a cause of concern for the luxury sector, saw a better-than-expected performance, even though sales slid by 7% YoY. Although luxury sales in China are fragile, today’s report could be a sign that demand is stabilizing in Asia. LVMH reports earnings at the end of January, and we expect a wave of analyst upgrades to their earnings after Richemont’s surprise report. LVMH is higher by 8% on Thursday, Kering is up by 7% and Hermes is higher by 5%, as luxury stocks lead the charge in the Cac 40.

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