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Analysis

Market Opportunities in Focus

BY Janne Muta, M.Sc in Finance

|January 30, 2024

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

The US Economy & The Dollar

Recent data indicates a positive start for the US economy in 2024. Business activity picked up in January, with a notable decline in inflation. This reflects a promising economic trajectory, bolstered by an expansion in both manufacturing and services sectors.

The S&P Global's flash US Composite PMI Output Index rose to its highest level since last June, indicating private sector growth. However, supply chain delays and labour shortages remain concerns, potentially impacting raw material prices and inflation in the future.

Furthermore, the US growth surpassed expectations in Q4 2023, growing by 3.3% quarter-on-quarter at a seasonally adjusted annualized rate. This marked the sixth consecutive quarter of outperformance, while consensus estimates have consistently underestimated the robust growth.

Key contributors to this growth included consumption, investment, and government spending. Despite strong economic data, US Treasuries traded higher and rate-cut pricing increased slightly.

This week's main risk events in the US are the Fed rate decision and the FOMC press conference on Wednesday, the ISM Manufacturing PMI release on Thursday and the Non-Farm payrolls report on Friday.

Central Bank Policy

The market is expecting the Federal Reserve to keep rates at 5.25–5.50%, but there is speculation about several rate cuts throughout 2024 as inflation weakens and the economy slows. Three Fed representatives have recently advocated for maintaining steady interest rates, but there is a roughly 50% probability of a rate cut at the next meeting in March

The ECB, while not discussing rate cuts at its recent meeting, signalled a move towards lower rates. Rates in the market decreased, with expectations leaning towards a cut in June, though the possibility of an earlier move exists.

The ECB kept rates steady, but the statement omitted previous references to elevated domestic price pressures due to recent core inflation declines. Lagarde emphasized data-dependency and did not rule out an April cut. On the labour front, she highlighted the importance of near-term developments and wage stabilization. The outlook suggests a 25bp rate reduction in June, with risks favouring an earlier start.

China's central bank has taken a significant step to stimulate the economy by cutting the reserve requirement ratio, releasing a substantial amount of liquidity ($140 billion) into the market. This move is seen as part of a broader strategy to support economic growth and manage deflationary risks.

However, analysts believe more stimulus may be needed to spur domestic demand and address consumption challenges, which are vital for a balanced economic recovery.

Equity Indices

US stocks paused their six-day winning streak, with the Nasdaq slipping due to Intel's disappointing earnings, causing an 11% drop in the stock. Tech had been driving the market to new highs. Nasdaq created a weekly bearish rejection candle last week signalling momentum loss.

The Dow Jones Industrial Average pushed into new all-time highs last week and has tested a key support level successfully while the German Dax index hasn’t made a new high since December and has been ranging sideways below the December high at 17,003.

The S&P 500 sector performance was marked by a strong rebound in the energy sector, which rose 2.18% as oil rallied from the base formation we've been focusing on recently.

Following closely, the industrials sector showed impressive gains, rising by 2.08%. The information technology sector also performed robustly, increasing by 2.07%. The materials sector was another strong performer, gaining 1.82%. Consumer discretionary wasn't far behind, registering an increase of 1.73%.

Financials saw a respectable gain of 1.46%, while the healthcare sector improved by 1.21%. Communication services and utilities sectors, although with more modest gains, were still in the green, ending up 0.93% and 0.72%, respectively. All in all, the sector performance indicates that the institutional investors have had a healthy risk tolerance as they have increased allocations in the cyclical sectors.

US Stocks

In this week's market, Netflix Inc. soared +17.62% due to strong fourth-quarter results and subscriber growth. NetEase, Inc. (NTES) also experienced significant gains of +14.32%. American Express Company (AXP) climbed by +11.29%, while International Business Machines Corporation (IBM) increased by +9.87%. Comcast Corporation (CMCSA) rounded out the top five with an +8.62% rise.

Conversely, Tesla Inc. led the downturn, dropping -12.73% after a disappointing fourth-quarter report and a bleak production outlook. 3M Company (MMM) followed with a -10.37% fall. Gilead Sciences, Inc. (GILD) decreased by -7.94%, Intel Corporation (INTC) declined by -7.13%, and Lockheed Martin Corporation (LMT) closed the bottom five with a -6.65% drop.

Gold & Oil

Gold prices have recently fluctuated within a narrow range with minor reactions to significant data releases. This indicates a cautious market sentiment as investors wait for further direction from the Federal Reserve regarding interest rate cuts.

While markets anticipate the Fed to maintain interest rates at its upcoming meeting, the possibility of rate cuts in the future has diminished. Lower interest rates reduce the opportunity cost of holding gold. Positive economic data and China's gold premiums climbing ahead of Lunar New Year celebrations are influencing short-term direction.

Oil prices surged to their highest levels in nearly two months last week. The rally was driven by positive US economic growth, Chinese stimulus efforts, and supply concerns in the Middle East.

Trading Opportunities in Focus

  • The recent price action in EURUSD and the dollar index (DXA) suggests that the dollar could continue to strengthen towards a key resistance level at 104.26. Alternatively, below 102.80 look for a move to 102.30.
  • Nasdaq created a weekly bearish rejection candle signalling momentum loss. The Dow Jones Industrial Average pushed into new all-time highs last week and has tested the 37,821support successfully. The German Dax index hasn’t made a new high since December and has been ranging sideways below the December high at 17,003.
  • USOIL has broken out of a base and has rallied towards the next key resistance area at 79.58 – 80.62. The nearest key support levels is at 75.28.
  • Gold is still trading inside a bearish daily trend channel but the bulls have been defending the 2009.60 level possibly trying to push the market above the bear channel high (currently at 2034. The nearest key support level below 2009.60 is at 2001.

Pay close attention to wording from the Fed on Wednesday, as it could significantly impact the market. Review your charts, identify key levels, and be ready to trade based on what you observe.

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Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% 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.

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Janne Muta, M.Sc in FinanceChief Market Analyst

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