Market opportunities in focus

BY Janne Muta

|February 27, 2024

Here's a brief overview of last week's key events and what you should closely monitor over the next few trading days.

US economy

In February, the US economy demonstrated mixed signals of growth and caution. The S&P Global US Composite PMI indicated a slight output increase to 51.4 from 52, with manufacturing benefiting from improved supply chains post-January's adverse weather, yet services business activity expanded more slowly, impacting overall growth.

Demand conditions showed an overall improvement, albeit at a reduced pace due to a smaller rise in service sector new business, leading to cautious hiring and a mild decline in future output confidence.

Despite these challenges, the US services sector marked its 13th consecutive month of expansion, though at a slower rate, reflecting resilience amidst the Federal Reserve's continued restrictive monetary policy. Cost inflation for businesses slowed to its lowest rate since October 2020, with a slight increase in selling price inflation.

A significant downturn was noted in Texas manufacturing, where the general business activity index fell sharply, signalling the deepest contraction in eight months. Yet, there's a glimpse of optimism with the future production index improving.

In the housing market, December 2023 saw a rebound in new single-family house sales, rising 8% to a seasonally adjusted annual rate of 664K, with significant increases across most regions except the West. Despite lower prices than the previous year, the housing market showed signs of momentum, potentially buoyed by expected Federal Reserve rate cuts in 2024.

The Federal Reserve

According to the FOMC Minutes published last week, the Federal Reserve's policymakers are cautious about reducing interest rates prematurely, amidst uncertainties on the duration of current borrowing costs needed to achieve the 2% inflation target. Emphasising a deliberate approach, they seek greater confidence in declining inflation before contemplating rate cuts, with concerns over inflation stalling if the economy remains robust. Rate reductions are unlikely to begin before June.

Stock indices

Equity indices gained last week with Dow Jones Industrial Average and German DAX rallying into new highs while Nasdaq remained below its recent ATH. Markets have remained strong buoyed by Nvidia's impressive earnings report. Despite the Federal Reserve's cautious stance on interest rate cuts and inflation concerns the stock markets has been driven by strong earnings and by the assumption that the Fed is now more likely to cut the rates this year rather than hike them.

The robust +2.05% uptick in Consumer Staples last week indicates a tilt towards defensive stocks, as these are typically favoured when institutional investors sense market turbulence or prefer less risk. This sector's resilience in economic downturns makes it a haven during uncertain times. Meanwhile, the Materials and Industrials sectors, with solid gains of +1.95% and +1.85% respectively, reflect a sustained appetite for risk, as these sectors are closely tied to economic activity and infrastructure development.

US stocks

The strongest performers in the TIOmarkets equity CFD space were NVDA (+6.37%), ABT (+5.25%), MAR (+5.21%) and BMY (+4.77%). On the downside biggest increases in the downside volatility were seen in: MELI -8.09%, ADBE (-6.18%) and TSLA (-4.99%). The biggest story last week was Nvidia beating earnings estimates. The company reported record Q4 and fiscal 2024 revenues of $22.1 billion (up 265% YoY) and $60.9 billion (up 126% YoY), respectively. CEO Jensen Huang highlighted the surge in demand for accelerated computing and generative AI. NVIDIA will pay a quarterly cash dividend of $0.04 per share on March 27, 2024.

Gold and Oil

The gold market rallied last week mainly due to dollar weakness. The markets expect to see a cut in US interest rates. The Fed rate cut is expected to come in June (62.7% probability for a cut). Also, the ongoing Middle East conflict, particularly the Houthi attacks on shipping lanes, increased gold's safe-haven appeal. These factors collectively contributed to the gold market's rally.

According to Reuters the decline in oil prices last week was influenced by a significant shift in global oil production dynamics. Over the last decade, the Western Hemisphere, particularly the United States, Canada, and Brazil, has dramatically increased its oil output, satisfying the rise in global consumption. This increased production has led to a surplus, reducing the Western Hemisphere's reliance on Eastern Hemisphere supplies and thus altering traditional trade flows. The shift has lessened geopolitical risks related to oil supply disruptions, especially for consumers in Asia, and has contributed to the downward pressure on oil prices.

Trading Opportunities in Focus

  • The economic resilience and the Federal Reserve's cautious policy approach could support the dollar by reflecting stability and a focus on sustainable growth. However, the anticipation of future rate cuts and ongoing uncertainties about inflation and economic performance may temper bullish sentiment towards the dollar, potentially leading to volatility or weakness in the short to medium term.
  • The weekly charts in the major equity indices, notably the Dow Jones Industrial Average and German DAX, remain strong after some indices rallied to new highs last week. Strong earnings reports and market optimism towards potential Federal Reserve rate cuts have supported the markets. Inflation remains a risk factor.
  • The commodities market saw a rally in gold prices due to dollar weakness and expectations of US interest rate cuts, alongside increased geopolitical tensions. The market created a higher low in the weekly chart which is a bullish indication. However, as the dollar lacks direction it is unclear whether the price of gold can sustain the upward momentum.
  • The oil prices declined, influenced by a shift in global production dynamics reducing Western Hemisphere's reliance on Eastern supplies. Lower reactionary highs below $79 suggest weakness. A strong rally above the level would change the technical picture and could lead to a sizeable rally. A failure to penetrate the $79 level would suggest the market could break the $76.60 support.

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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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