Market Opportunities in Focus

BY Janne Muta

|February 20, 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 January 2024, annual core consumer price inflation remained at a 2-1/2-year low of 3.9%, against expectations of a drop to 3.7%. This was largely due to a notable 6.0% increase in shelter costs over the year, significantly influencing core inflation. Monthly core inflation unexpectedly rose to 0.4%, the highest since April 2023. Despite these pressures, overall inflation fell to 3.1%, helped by a significant 6.4% decrease in gasoline prices. Retail sales, conversely, saw a significant reduction of 0.8% in January, the most considerable decline since the previous March, attributed to post-holiday season adjustments and colder weather.

Furthermore, an unexpected rise in producer prices led to a bond sell-off, resulting in higher bond yields and a stronger dollar as markets revised Federal Reserve rate cut expectations. The market now anticipates three cuts by year's end.

Stock indices

The major US and European equity indices lost momentum last week as inflation figures surpassed expectations, and yields rose. Disappointment due to persistently high headline and core inflation rates weakened indices and elevated the VIX index. Additional softness appeared on Friday as both the headline and core Producer Price Index (PPI) hinted at elevated future consumer inflation (Consumer Price Index or CPI).

The Energy sector led gains in the US last week with a 1.63% increase, closely followed by Utilities and Real Estate, both of which recorded over 1.5% growth. Health Care and Financials saw modest growth at 0.98% and 0.94%, respectively. The 1.79% decline in the Technology sector suggests growing investor concerns about tech stock valuations amid rising yields and a longer-than-anticipated hawkish Federal Reserve policy.

US stocks

The biggest increases in the downside volatility in the TIOmarkets equity CFD offering last week occurred in ADBE, CDNS, and DE. Adobe shares dropped 11.26%, reflecting broader market concerns, particularly around competition in the AI sector. Last week, the stock prices of both Google and Adobe were impacted by fears that OpenAI could challenge these tech giants.

Cadence Design Systems (CDNS) experienced a 6.6% decline despite an upgrade by Morgan Stanley to overweight and a price target adjustment to $350 from $260. The company reported a revenue of $1.07 billion for Q4 2023, an 18.8% increase, with EPS rising significantly from $0.96 a year ago to $1.38.

John Deere, the world's largest agricultural equipment maker, reported robust first-quarter fiscal 2024 results, surpassing earnings and revenue estimates. Nevertheless, Deere cut its annual profit forecast last week, leading to a more than 6.6% drop in its shares.

Gold and Oil

A weakening dollar in recent days has buoyed the gold market, while ongoing Middle East geopolitical tensions have driven safe-haven flows into gold. An attack on a UK-registered ship near Yemen further supported gold prices. Technical analysis suggests gold prices might rise, although higher yields pose a risk.

Middle East tensions also pushed oil prices up at week's end, despite the International Energy Agency's (IEA) reduced forecast for oil demand growth. The IEA reports a slowdown in global oil demand growth, with a significant reduction in China's consumption impacting the overall decrease in the last quarter of 2023. Global oil supply fell markedly in January due to Arctic weather events and increased OPEC+ cuts. However, record outputs from the US and Brazil are expected to boost non-OPEC+ supply this year, albeit at a slower rate than in 2023. Refinery activity should recover after February's lows.

Trading Opportunities in Focus

  • Core inflation remained steady in January 2024, defying expectations for a decrease, with shelter costs significantly driving this trend alongside a notable drop in overall inflation due to falling gasoline prices. In theory this should keep the dollar bids firm even though over the last few days USD has given back the gains that followed the CPI data release last week.
  • Equity indices lost momentum due to unexpectedly high inflation numbers, with the Energy sector leading last week's gains, highlighting growing concerns over tech valuations.
  • Adobe's significant stock price drop reflects broader market concerns around AI competition, with major movements in equity markets influenced by both sector-specific updates and overarching economic indicators.
  • Gold prices benefited from a weakening dollar and Middle East tensions. Technically the market could have more upside ahead but the rising bond yields remain a risk.
  • The oil market has been gaining despite a forecasted slowdown in demand suggesting strength.
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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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