Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Summary: The FOMC meeting saw the Fed significantly raising its near-term growth and inflation forecasts, but the median policy rate forecast continues to express the view that the Fed will not raise rates until 2024. This appears to be the Fed declaring that the US economy will be allowed to grow as fast as it can, with prices rising as fast as they want to for now, without any push-back from the Fed. Gold popped higher while the US equity market did respond with a rally, if a bit sluggishly, given the clear green light from the Fed.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities rebounded from a pre-FOMC sell-off and even managed to post a new high close for the cycle, given the supportive message from the Fed (more on last night’s FOMC meeting below). Arguably, an even more enthusiastic reaction was warranted. For now, the key will be whether the market retains a bid tone after the Fed has essentially sent about as accommodative a message as possible. Any slip in the S&P 500 could set up a sell-off toward the first retracement support at 3,876 (close to the 21-day SMA) and the bigger 61.8% retracement level at 3,813 is far away for now. The Nasdaq 100 is interacting with the important 13,245 area 61.8% retracement and the big flat-line resistance area as high as 13,337 that is the last big resistance ahead of the all-time highs above 13.880.A key potential headwind for equities despite the Fed’s accommodative message could be the still high long US treasury yields, especially if they head higher still.
Bitcoin () and Ethereum () - Bitcoin is seemingly more enthused than other assets at the Fed’s message last night and rebounded as high as 59k last night, taking out resistance on the way up and leaving the high above 61k as the final hurdle. The comeback in Ethereum has proven more muted and it still trades within the range of the last week. Yesterday, Morgan Stanley was the first large US bank to announce it would allow wealthy clients to purchase Bitcoin.
EURUSD – EURUSD rose in the wake of the FOMC meeting as the accommodative message from the Fed weighed heavily on the US dollar, as the Fed won’t react for some time almost no matter how high inflation goes. The technical key here for establishing whether EURUSD is reversing the focus back higher is the 1.2000 level and whether the pair can close clear of that level into the end of this week, which could set up a run back into the former range toward 1.2300+. Can EURUSD do so if US nominal long yields continue their march higher?
USDJPY and JPY crosses – long yields continued to rise yesterday in the wake of the FOMC meeting, one of the key coincident indicators for JPY direction. The JPY bounced a bit overnight on additional rumors about the allowing more flexibility in yield movement at the longer end of the Japanese sovereign yield curve, but we need to have a look at what the tonight for confirmation. Until then, the 110.00 level looks important in USDJPY for whether the range to 115.00 (this scenario only likely if caps longer yields, even if raising the cap, and US yields at 10+ years continue to soar higher.).
Gold (XAUUSD) received a boost after the FOMC doubled down on its dovish stance by maintaining an outlook for unchanged rates until 2024. The support was primarily provided by a weaker dollar, with yields hardly moving. In addition, and for gold very important, by allowing the US economy to run hot for longer, the Fed is not going to stand in the way for higher inflation. Despite having broken above its 21-day moving average and the downtrend from the January high, both around $1745, gold still needs to break back above $1765 in order to start attracting fresh fund buying and momentum.
Crude oil (OILUKMAY21 & OILUSAPR21) continues to trade in a relative tight range in Brent defined by $66.5 to $70. Yesterday’s weakness was driven by another weekly rise in US crude oil stocks andthe International Energy Agency after their monthly report gave a cold shoulder to the prospect for a super-cycle in crude oil, siting ample oil inventories and a hefty amount of spare production capacitythat is being held back by OPEC+ members.In addition, a full recovery in global demand is not expected until 2023. Continued focus on yields and dollar where adverse movements could trigger further reductions in speculative positions.
Today’s ten-year TIPS auction is going to be decisive to set sentiment in Treasuries after the FOMC meeting (TLT, IEF). There are only two option: either the market trusts the Federal or it does not. We will have this answer today when the US Treasury is going to sell 10-year TIPS. If we see real rates dropping or being stable, then the market accepts that the Fed has inflation under control, thus there is no reason for nominal yields to rise. On the other hand, if the selloff resumes and real rates end up higher, it means that the market has little confidence in the Fed, and that it is taking the situation in its own hands. Be ready for another hectic day ahead!
Bank of England will try to mimic the Federal reserve, however there is the risk that it will sound too hawkish (IGLT). The BOE will share the same ideas of the Federal Reserve: higher yields are not a problem due to the good economy expectations;thus, higher yields are a positive signal. However, officials from the BOE have recently gone to lengths saying that the quantitative easing is harmful for the marketsounding alarm bells in the bond space. We believe that there is the risk that 10-year Gilt yields will breakeven above 0.86% today,accelerating their rise to 1%, when finally higher yields will start to become more of a problem for the central bank.
What is going on?
FOMC gives the green light to the economy and risk assets – As posted in our reaction piece to the FOMC last night, the general message from the Fed is that it will allow the US economy to grow and reflate as fast as it wants to for now without any restraint from the Fed. This was made clear in the Fed’s revising higher its GDP and PCE core inflation forecasts for this year (if to a far lesser degree for next year and 2024) without any rise in the median policy rate forecast, which remains for a lift-off in 2024. An interesting statement in the Q&A from Fed Chair Powell indicated that the Fed is very “outcome focused”, I.e., that it really wants to see the inflation levels sustainably above 2% before signaling anything.
Biden criticizes Russian leader Putin, says he will pay for US election interference – In an interview on US television, US President Biden agreed that Putin is a “killer” (agreeing with the statement rather than saying it himself) and said that Putin will “pay a price” for interfering in US elections, without specifying what that means. He also said that in a phone call with the Russian leader that he told him “I know you and you know me. If I establish this occurred, then be prepared.” The ruble stumbled badly when the interview broke.
What are we watching next?
Geopolitics on our minds – US, Russia, China. Yesterday reminded us, with the Biden interview discussing Putin (noted above) and with the upcoming meeting between US and Chinese officials in Alaska, that geopolitical risks could crop back up on the market’s radar – worth noting ahead of the weekend. Let’s recall how much the US-China trade deal distractions were a difficult part of the market environment during the Trump presidency.
Fed to address SLR issue in coming days–the special rule enacted during the pandemic panic last year allowing US banks to suspend leverage rules, and whichis set to expire at the end of this month, was not addressed at the FOMC meeting yesterday, but Fed chair Powell said that the market should expect an update in coming days. There may be some residual unease around the issue if the rule suspension expire at the end of this month, but the Fed went a long way to easing concerns about the shortest end of the US yield curve (caused chiefly by the US treasury drawing downs its holdings at the Fed) by allowing banks to park up to $80 billion in Fed repos versus the prior $30 billion. Another option is that the Fed merely extends the status quo another few for banks to prepare.
Tonight’s Bank of Japan meeting – the Bank of Japan has a tough task in communicating its intentions as it would like to see a more dynamic Japanese government bond market without fulling letting yields at the long end of the curve rip higher (which the US is doing, hence the strong move higher in USDJPY). How will the walk the tonight? This is an important meeting because the bank has promised a policy review.
Earnings releases to watch this week:
Today’s highlights include Nike and FedEx, with Chinese names prominent through the end of this week:
Today:CK Hutchison, China , CK Asset, CGN Power, Audi, Nike, Enel, FedEx, Accenture, Dollar General
Friday: China Mobile, Zijin Mining, Hong Kong & China Gas, Zhongsheng Group
Economic Calendar Highlights for today (times GMT)
0830 – Sweden Feb. Unemployment
0900 – Norway Bank Deposit Rates
1100 – Turkey Rate Decision
1100 – ECB President Lagarde to Speak
1200 – UK Bank of England meeting
1230 – US Initial Weekly Jobless Claims
1230 – US Mar. Philadelphia Fed Survey
1430 – EIA's Weekly Natural Gas Storage Report
1555 – US Fed Chair Powell to Speak
2330 – Japan Feb. National CPI
0030 – Australia Feb. Retail Sales
Bank of Japan announcement and policy review
1100 - Inflation - and why it matters by Saxo's CIO Steen Jacobsen. Sign up here
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