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By Michael Brown Senior Research Strategist at Pepperstone

DIGEST – A sector rotation continued in the equity complex yesterday, as the dollar rebounded, and metals rolled over again. Today, decisions from the ECB and BoE highlight the calendar.

WHERE WE STAND – I suppose that the general vibe of trade yesterday can best be described as ‘sell software’ and ‘buy the real economy’.

Once again, it proved a day where headline moves in equity benchmarks – which all took a chunky lurch lower – don’t really tell the full story. Of course, when the top 10 stocks in the S&P, all of which are in some way tech-, make up almost 40% of the index by weight, moves in the sector have an outsized impact on the benchmark at large. This, obviously, is exacerbated in the case of the tech-heavy Nasdaq 100, which again underperformed.

What we have, then, is a market where things appear somewhat shaky at a surface level, but where I’d argue things are considerably more resilient under the surface. For instance, 72% of the S&P ended yesterday in the green, despite the headline declines, while cyclical sectors again outperformed on the day. Interestingly, there are both ‘push’ factors driving this churn, as participants take an increasingly sceptical view of the AI theme, as well as ‘pull’ factors amid increasing signs of robustness in the underlying US economy, as evidenced by this week’s solid ISM manufacturing and services surveys. In fact, per Citi’s economic surprise index, incoming US data is now beating expectations by its biggest margin in two-and-a-half years; that’s hardly a bearish indicator in my book!

In fact, my view remains that the fundamental bull case remains a robust one, and that in many ways a broader rally, of the ilk that we are now beginning to see, is actually a good thing. Fundamentally, we still have an environment of robust economic growth and resilient earnings growth, coupled with both a ‘Fed put’ and a ‘Trump put’ to backstop sentiment. I struggle to envisage a more positive environment for risk, in all honesty. There’s also, of course, the continued positive tone on the trade front to consider too, especially after a positive Trump-Xi call yesterday.

Anyway, setting aside the stock market churn, a couple of other notable themes standout from yesterday.

The first, softness in precious metals. Vol remains at frankly ridiculous levels, on both a realised and implied basis, though what is of most interest is how spot gold gave up gains to end the day below $5,000/oz, and spot silver surrendered the advance to close beneath the $90/oz mark, before the latter again cratered overnight. These levels, naturally, now stand as key resistance levels to the upside, though I maintain my view that the best thing for metals right now would be to become boring again, undergoing a period of consolidation, allowing the solid fundamental bull case to again catch-up with the price action, and build a more durable rally once more.

The second, gains in the dollar. As flagged previously, now that noise on both the trade and geopolitical fronts appear to have been dialled down just a touch, market participants seem again able to re-focus on the ‘US exceptionalism’ narrative once again, with growth in the States set to vastly outpace that seen in DM peers over the course of the year ahead. Providing that that noise can remain at a relatively low volume, further USD gains are likely on the cards.

LOOK AHEAD – A busy docket today, with both the BoE and ECB set to announce policy; I’d love to have a word with whoever decided that those two should have their next three announcements on the same day as each other!

Anyway, neither is likely to spring any surprises today. The BoE will hold Bank Rate steady at 3.75%, in what I expect to be a 6-3 vote, while maintaining guidance alluding to further rate reductions in the near future, providing that the inflationary outlook remains favourable. On that note, the Bank’s updated economic forecasts should pencil in a return to the 2% price target this spring, before remaining at that level for the remainder of the horizon, in turn laying the groundwork for a cut as soon as the next meeting, in March. An increasing margin of labour market slack further supports this view, particularly with unemployment projections likely to be nudged higher, to a peak of around 5.3% in Q2 26.

As for the ECB, Lagarde & Co are also set to stand pat, maintaining the deposit rate at 2.00%, while reiterating that they will continue to take a ‘data-dependent’ and ‘meeting-by-meeting’ approach to future policy decisions. For all intents and purposes, though, the easing cycle is now over, especially with Lagarde likely to reiterate that that policy is in a ‘good place’ at the post-meeting press conference.

Besides that, the weekly US jobless claims report might be worth a glance over, though neither the initial nor the continuing claims prints pertain to the survey week for the January jobs report. Meanwhile, on the earnings front, the slate is highlighted by Amazon (AMZN) after the close, where options price a punchy +/-7.4% move in the stock, with AWS revenues/guidance of particular interest.