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Analysis

Market Opportunities in Focus

BY Janne Muta

|March 5, 2024

Here's a brief overview of last week's key market themes and what you should closely monitor this week.

US economy

In January 2024, the US witnessed a significant 6.1% drop in durable goods orders, the most severe since April 2020, primarily due to a 16.2% fall in transportation equipment orders. Despite this downturn, non-defence capital goods excluding aircraft saw a slight 0.1% increase.

The US economy expanded by 3.2% in Q4 2023, slightly below the initial 3.3% estimate but following a robust 4.9% growth in Q3. This growth was slightly dampened by private inventories, contrasting with an upward revision in consumer spending, especially in services, and a notable increase in government expenditure. The economy grew by 2.5% in 2023, showing improvement from the 1.9% growth in 2022.

Core personal consumption expenditures (PCE) prices in January rose by 0.4% month-on-month, the most since February 2023, with a year-on-year increase of 2.8%, the lowest since March 2021. However, the ISM Manufacturing PMI indicated continued contraction in the manufacturing sector for the 16th consecutive month in February 2024, with a drop to 47.8.

The Federal Reserve

Friday’s weak manufacturing data together with relatively dovish Fed talk pressured the dollar. With weaker construction spending and manufacturing survey the dollar came under pressure sending the technology stocks and gold higher.

Two weeks ago, the FOMC Minutes revealed how the Federal Reserve's policymakers were cautious about reducing interest rates prematurely. Last week, comments from Federal Reserve officials offered reassurance that the US economy is on a steady path towards disinflation without jeopardising the job market.

Fed's Kugler highlighted that firms are adjusting prices more slowly, reinforcing confidence in disinflation. She remains "cautiously optimistic" that inflation will continue to fall without causing harm to employment, citing that Fed policies have effectively reduced inflation pressures and anchored expectations.

Conversely, Fed's Goolsbee struck a slightly dovish note, particularly on housing inflation, emphasising the need for vigilance. Goolsbee believes the real Fed funds rate is historically high, advocating for not maintaining elevated levels longer than necessary.

Waller, on the other hand, shifted focus towards the Fed's balance sheet normalisation. He suggested shifting towards shorter-dated Treasury securities. This is dovish as it prepares the Fed for a more flexible and responsive monetary policy environment.

Short-term securities are more closely aligned with the Fed's policy rate, allowing for easier adjustments in response to economic changes without causing undue market stress. This suggests a preference for maintaining a supportive environment for economic growth over aggressive inflation fighting. Fed Chair Powell’s testimonies this week are expected to shed more light on the interest rate policy in the near future.

Stock indices

Stock indices continued their upward trajectory, with the S&P 500 moving into record highs once again. The index was driven by Nvidia, which saw a 4% increase. All three major indices, Dow, S&P 500 and Nasdaq ended the week in positive territory.

Thanks to strong performances from semiconductor firms like Intel, Qualcomm, and AMD, the Nasdaq remained the best performer last week. The best performing S&P 500 sector was Real Estate with a +3.29% gain while the Health Care sector fared the worst. The sector declined by 0.52%.

US stocks

AMD’s stock has seen significant growth (+11.43% last week), hitting new highs, due to its foray into AI chips. Despite fears of being "too hot to touch" and possible short-term reversals, the stock retains growth potential. The broader optimism for lower interest rates and AMD's promising AI chip sales support a strong outlook.

At the same time, Monster Beverage Corporation's shares saw a 6.7% increase last week after releasing its full-year results, aligning with analyst predictions with revenues of $7.1b and EPS of $1.54. Despite the positive earnings report, analysts' revenue expectations slightly decreased from $8.01b to $7.97b, while EPS forecasts remained unchanged at $1.82 for 2024.

Salesforce.com (CRM) rallied 6.3% last week, and 10.9% over the past month outperforming the S&P 500's 4.8% gain. This growth comes as the company's upcoming earnings estimate revisions show a positive outlook with a projected earnings increase. Additionally, Salesforce.com's revenue forecast suggests continued growth indicating further potential in the stock.

Gold and Oil

The gold market rallied strongly to a two-month high primarily due to muted economic data, which bolstered expectations of a U.S. interest rate cut by June. The weakening of U.S. manufacturing activity in February and subdued consumer sentiment, as indicated by the University of Michigan's surveys, played a key role in shaping these expectations. Additionally, the tame PCE data kept the possibility of a Federal Reserve rate cut on the table.

Oil prices climbed higher last week as markets anticipated an OPEC+ decision on supply for Q2 2024. Expectations of OPEC+ extending its voluntary production cuts into the second quarter buoyed the market, with a decision expected in early March. Geopolitical tensions in the Red Sea also supported the oil price.

At the same time, the contraction in Chinese manufacturing activity for the fifth consecutive month could pressure oil prices due to China's role as a major global consumer of oil. Decreased manufacturing activity can indicate slower economic growth, leading to reduced demand for oil and potentially lower oil prices.

Trading Opportunities in Focus

  • The overall US economic expansion in Q4 2023 slightly missed initial estimates but indicated improvement over the previous year providing support to the stock market.
  • Recent comments from Federal Reserve officials have reassured the markets of a steady path towards disinflation, potentially without harming the job market. The cautious stance on interest rate reductions, combined with discussions on balance sheet normalisation, suggest a dovish approach aiming to support economic growth. Look for further pressure on the USD which could support equities and gold.
  • The upward movement in stock indices, led by significant gains in technology stocks such as Nvidia, reflects positive market sentiment. The S&P 500's achievement of new record highs, supported by strong performances in the semiconductor sector, underscores the market's strength.
  • The rally in the gold market, driven by expectations of a US interest rate cut, and the rise in oil prices due to OPEC+ supply decisions and geopolitical tensions suggest further upside for the price of oil. However, the impact of Chinese manufacturing activity could be a dampening factor on oil demand.
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While research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.

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Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

DISCLAIMER: TIO Markets offers an exclusively execution-only service. The views expressed are for information purposes only. None of the content provided constitutes any form of investment advice. The comments are made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances, or needs. The content has not been prepared in accordance with any legal requirements for financial analysis and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval.

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Janne Muta

Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.

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