Jessica Amir
Market Strategist
Summary: Equity markets lose steam and trade cautiously ahead of the Fed’s preferred inflation gauge. The S&P500 closes above it 200-day average for the second day - a sign there are more bulls in the market than bears, but Tesla's results could rock the boat. Australian and NZ CPI blow hotter than expected. Gold is on the cusp of a bull market. Oil slides, investors buy the dip ahead of the EU ban on Russian oil.
US equity markets were a bit dull on Tuesday with investors weighing up mostly stronger than expected Microsoft earnings results, vs a weaker than expected earnings from chipmaker giant, Texas Instruments. The S&P500(US500.I) fell 0.1% but closed above it 200-day average for the second day (a sign there are more bulls in the market than bears), while the Nasdaq 100 (NAS100.I) lost 0.2%. Still markets are waiting for the next major catalysts; Tesla’s results on Wednesday, then later in the week the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) price index for December to gauge if the Nasdaq’s rally of 11% from its low can be sustained, especially as the PE for the Nasdaq is about 54.6 times earnings; meaning tech stocks are still quite expensive compared to their averages. The risk is if Core PCE doesn’t fall as expected from 4.7% QoQ to 3.9%, then we could see a selloff in equity markets, while the US dollar would be bought as hotter inflation supports the Fed keeping rates higher for longer. However, the S&P500 is seemingly bullish for now, until the next tests (some of which we mentioned), click for an in depth Technical Analysis on what the next levels could be for the S&P500.
After hours Microsoft (MSFT) shares gained 4.3% with investors relieved its revenue in constant currency rose 7% in the quarter, versus the 6.59% estimate. Microsoft’s closely watched Azure cloud-computing business, sales gained 38%, compared with predictions for a 37% increase, excluding the impact of currency fluctuations. This underscores Azure’s ability to help drive the company forth, even as sales of Windows software to PC makers plummeted amid a slumping market. Adjusted earnings per share came in at $2.32, slightly better than the $2.30 estimate, thanks to the cost cutting. Capital expenditure was $6.27 billion, less than Bloomberg estimated ($6.63 billion), while revenue slightly missed expectations hitting $52.75 billion vs the $52.93 billion estimate.
Oil dropped, with WTI falling $1.8% below $81 after as OPEC+ are expected to keeping oil production unchanged when they meet next week as they await clarity on Chinese demand and the impact of EU’s ban on Russian supply (from Feb 5). Copper declined 0.2% with investors booking profits after the copper prices gained 32% from their low. Traders bought into Wheat, lifting the Wheat price up 2% as its trades at year lows. While Gold nudged up 0.4%, taking its total rally off its low to 19.5%, meaning gold is on the cusp of a bull market. Be mindful that we also think gold could also face profit taking, or a consolidation. Ole Hansen, head of commodity strategy discusses that here.
After Australia’s ASX200(ASXSP200.I) rallied for five straight days, the market fell like a knife on Wednesday after CPI came out hotter than expected supporting the notion that the RBA can keep rates higher for longer, despite the services sector remaining in contractionary phase. You have to remember Australian CPI has now on numerous occasions been hotter than expected. So given the market is up 16% from its low, we are seeing traders and investors book in profits ahead of the public holiday tomorrow and ahead of next week's RBA decision. Oil stocks such as Santos, Woodside, WorleyParsons, Ampol trade lower but some longer term investors would be seeing this pull back as an opportunity to buy the dip. Why? Oil prices remain supported ahead of EU’s ban on Russian oil coming up (Feb 5), which will restrict oil supply, plus we’re seeing APAC air travel rev up and this is expected to continue over the medium term; which is also driving demand for diesel and underpinning oil demand.
The Aussie dollar vs the US (AUDUSD) trades at its highest levels since August, 70.64 US, after AU CPI came out showing prices are up 7.8% YoY, vs 7.6% expected. Core mean CPI rose 6.9% YoY, also hotter than the 6.5% expected. This means the RBA has more fire power to keep rising rates, despite the services sector remaining in a contraction (with a reading of under 50). If the AUDUSD's 50 day simple moving average crosses above the 200 day, marking a ‘golden cross’, we could see a quick run up to 0.7137, the August peak. It’s also worth watching the AUDEUR as bullish momentum could see the pair on the weekly chart cross over its 100-day moving average.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.