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Euphoric US stock market reached new all time high – S&P 500 tops 5,000 mark: February 2024 Market Commentary

February 15, 2024

US Growth and Inflation: More resilient than expected
US Fed & ECB Central Bank rate cuts: delayed till inflation is closer to 2%
Global markets: We expect a supportive environment for both equities and bonds this year as growth is resilient and at some point, Central Banks will cut rates
Cash deposits are at an all time high: There is still time to lock high interest rates to remunerate cash
Geopolitical risks intensify: Red Sea disruptions, trust in NATO shaken, US-China tensions

Global Macro: Growth is stabilizing in positive territory

The start of the year saw economic growth steadying, suggesting a serious recession may be circumvented across key global markets, with growth maintaining a positive trajectory: the U.S. at +3.1%, Europe at a modest +0.1%, and China at +5.2%.

In the US: Economic momentum.

U.S. GDP growth outpaced expectations at 3.3% for Q4. The Services Sector saw a leap in the ISM Services PMI to 53.4 from 50.5, signaling robust expansion, outperforming predictions. Manufacturing conditions improved more than initially estimated, with the PMI revised to 50.7, the highest point since September 2022.

Employment data showed significant gains, with non-farm payrolls adding 353K jobs in January, far exceeding the expected 180K, marking the largest increase in a year. Job growth was notably strong in professional services, healthcare, and retail. The unemployment rate held firm at 3.7%.

In Europe: Growth landing at zero.

The Euro Area’s Composite PMI ascended to a six-month high of 47.9 in January, stable from December and aligned with forecasts, yet signaling sectoral contraction beneath the 50.0 threshold. Service sector activity contracted further, with a PMI of 48.4, not meeting the expected 49. Manufacturing activity reached a ten-month zenith at 46.6, echoing early estimates. The unemployment rate in January remained constant at 6.4%, meeting expectations. Additionally, inflation projections for the next year declined for a third month to 2.8%.

In China: Stabilizing growth around 5% in 2024 with strong positive trade balance of USD 75bn per month.

China’s private sector marked its 13th consecutive month of growth, with the Composite PMI registering at 52.5 in January 2024, slightly down from the previous month’s seven-month peak of 52.6. The services sector saw a marginal softening, with the PMI dipping to 52.7. Manufacturing PMI remained steady at 50.8, defying expectations and signaling a third month of expansion, despite official data suggesting a prolonged slowdown prior to the Lunar New Year. In a significant turn, China’s consumer prices experienced the sharpest annual decline in over fourteen years, falling by 0.8% in January 2024.

Financial Markets: Global year end rally

Global investors currently maintain historically high concentration levels in U.S. equities and bonds. This concentration poses an inherent risk to U.S. asset stability, should investors elect to reallocate their portfolios more diversely across different geographical markets.

Equity: In January, global equity markets were mixed, with developed markets (US, Europe) carrying on their 2023 rally and China & India retreating. Equity performance was positive in both the US (S&P 500 +3.3%; Nasdaq 100 +3.3%) and Europe (EuroStoxx50 +3.1%), while Chinese stock performance was negative (HSCEI -7.9%). Fixed Income: The 10-year US yield bounced back 19bps to 4.06% and the 10-year German yield 27bps to 2.27%. Amid this “risk-on” mood in the developed markets, High-Yield bond prices declined 0.3% in USD and increased 0.1% in EUR. Currencies: All major currencies declined ~2%-4% versus the USD as US interest rates increased across the maturity curve and the US Fed signaled a delay to rate cuts.. Commodities: Gold declined 1.9% on higher interest rates. Oil prices bounced back 8.6% amid disruptions in the Red Sea shipping lanes.

Equities: Fueled by growth resilience

Global equity markets concluded January on a positive note, with a total return of 0.6%, while the S&P 500 achieved a 3.3% return. Market conditions are currently favorable, and there is an anticipation of further record-setting performance in 2024. This optimistic outlook is attributed to sustained albeit moderating economic expansion, receding inflationary pressures, and the prospect of upcoming reductions in interest rates by central banks.

In the US: New all time high, S&P 500 Tops 5,000 Mark

Following a robust rally in the last quarter, market sentiment at the onset of 2024 was initially muted among equity investors. However, confidence was restored, propelling the U.S. S&P 500 index to unprecedented levels with prospects for continued upward movement. U.S. equities achieved new records, buoyed by stellar performance from major technology firms. Shares of Meta soared by 20.32% subsequent to the declaration of its inaugural dividend and a notable two-year peak in quarterly revenue growth. Amazon’s shares surged by 7.87% on the back of a 14% revenue increase. Nvidia also saw its shares climb by 4.97%. In contrast, Apple’s shares experienced a marginal dip of 0.54%, amidst underwhelming sales figures in the Chinese market.

In Europe: EuroStoxx50 at 23-Year High

European equities advanced, building on the previous year’s positive performance as investors anticipated new corporate earnings and macroeconomic releases to gauge the economic impact of sustained high interest rates. The Eurozone’s Stock 50 index rose by 3.1%, sustaining its position at a 23-year peak. Shares in the consumer cyclical sector continued to lead the rally, buoyed by favorable reports from luxury goods companies Hermes, LVMH, and automotive manufacturer Ferrari. The Swiss market posted a 2.7% gain, while the UK market experienced a contraction of 0.9%.

In China: Equity investor’s capitulation

In January, China’s Hang Seng China Enterprise Index fell by 8.5%, reflecting investor concerns over China’s economic growth and potential new U.S. trade restrictions. Speculation about increased tariffs from potential presidential candidate Donald Trump further dampened sentiment. China responded by appointing a new securities regulatory chief and taking actions to stabilize the market, including restricting short-selling and bolstering ETF investments through state funds.

Currency Outlook: US Dollar remains elevated while US Interest rate cuts are delayed

EURUSD: Stuck in the [1.05 ; 1.10] range

The EURUSD pair declined to 1.07, marking its weakest position since November 13th, amid a pivot by investors towards the U.S. dollar. This shift was influenced by reduced expectations of an early Federal Reserve interest rate cut following unexpectedly high U.S. inflation figures. Escalating geopolitical tensions in Ukraine and the Middle East, coupled with disappointing economic indicators, contributed to the euro’s depreciation. The ongoing economic weaknesses within Europe may lead to further weakening of the EURUSD in 2024.

USDRMB: Stuck in the [7.00 ; 7.30] range

The yuan depreciated beyond 7.22 against the dollar, reaching its weakest point in almost a month, amid ongoing deflationary concerns in China that are increasing expectations of additional monetary stimulus. Chinese officials are anticipated to intervene to stabilize the currency as part of broader efforts to bolster economic recovery. The yuan has been underpinned by expectations of more decisive policy actions to support Chinese financial assets. The nation’s securities’ regulator has committed to mitigating abnormal market volatility and plans to brief President Xi Jinping on the market situation. Within this context, for companies with exposure to the RMB that haven’t already hedged their currency risk, please don’t hesitate to reach out to the SystematicEdge team to discuss hedging strategies to mitigate the risks associated with currency volatility.

USDJPY: Back at the all time high

The Japanese yen continued its downward trajectory, surpassing the critical threshold of 150 yen against the dollar, catalyzed by unexpectedly high U.S. inflation data which bolstered the U.S. dollar. The yen was further burdened by indications that the Bank of Japan is likely to maintain a cautious stance on interest rate hikes, even amidst considerations to move away from its negative interest rate policy.

Fixed Income: Central Banks delay rate cuts extending the opportunity to remunerate cash deposits with high interest rates

The U.S. Federal Reserve maintained the federal funds rate at the 23-year peak range of 5.25% to 5.5% during the January 2024 meeting, marking the fourth consecutive hold at this level. Federal Reserve officials indicated a rate reduction is unlikely until there is substantial assurance that inflation is on a consistent path back to the 2% target. Concurrently, the yield on the U.S. 10-year Treasury note remained in the vicinity of 4.30%.

At its initial 2024 meeting, the European Central Bank held interest rates steady at unprecedented highs, committing to keep rates at restrictive levels until inflation aligns with the 2% target. Meanwhile, the yield on Germany’s 10-year bond escalated past 2.40%.

The yield on China’s 10-year government bonds persisted at around 2.45%, close to the lowest rate seen in more than twenty years. This sustained low yield comes amid persistent deflationary trends within the Chinese economy, which continue to underpin expectations for further monetary easing measures.

We believe there is a window of opportunity that we have not seen in the past 20 years where it is now possible to receive substantial income from cash deposits, with duration of 3 to 6 months (5.50% in USD and 4% in EUR). High interest rates can be locked for longer periods by investing cash in bonds from large investment grade banks, which can provide an income per annum from 5% to 6% net in USD or 4% net in EUR, with a duration of 3 to 10 years.

Commodities

Gold: Retreated due to delayed interest rate cuts

Gold sold off from its record peak of USD 2,135 per ounce, stabilizing at the USD 2,000 support level. Market participants are forecasting an upsurge in demand for gold-based exchange-traded funds (ETFs) in response to an anticipated cut in interest rates. Production impediments, owing to the shuttering and ongoing maintenance of mining operations have culminated in the lowest global gold output in twenty-three years, which is expected to support gold prices in the future.

Oil: Bearish anticipation with volatility

Oil prices rallied 8.6% in January 2024 to around USD 77/barrel. Persistent economic concerns in China are expected to dampen crude demand as the IMF projects a deceleration in China’s growth to 4.8% in 2024, reducing further to around 4% by 2028. Meanwhile, a potential Israel-Hamas ceasefire alleviated transit risks in the Red Sea although OPEC’s decision to uphold output reductions of 2.2 million barrels daily into Q1, still poses challenges to global supply.

Risks:

War escalation in Ukraine or the Middle East: These conflicts hold significant implications for Europe. Statements made by former President Donald Trump concerning the United States’ potential withdrawal from NATO commitments have notably undermined the confidence of U.S. allies. Any change in the balance of power in Europe, in favor of Russia, could precipitate a rapid devaluation of EURUSD, potentially driving it towards the 0.90 threshold or below.
US-China tensions: US-China friction remains strong, with increasing tension around Taiwan and the South China Sea.
Recession: So far, the US has escaped recession although growth has been tepid, while in Europe anticipated growth is close to zero. By contrast, Asia is experiencing stronger, sustainable growth, fueled by China’s slowing, yet substantial growth close to 5% in 2024.

Opportunities:

Income from safe cash deposits: Cash can be safely placed in cash deposits and earn annualized net interest, e.g. over a period of 6 months: 5.50% in USD, 4.30% in EUR, 5.00% in GBP, 5.00% in AUD
Income from Investment Grade bank bond issuers: Major banks are implicitly protected by central banks as demonstrated in the Credit Suisse crisis where actual bonds (not AT1) remained secured. Investors can benefit from substantial yields from a diversified bank bond portfolio of 3 to 10-year duration: close to 6% in USD, 4.5% in EUR, 5.5% in GBP.
All time high compelling “risk premium” for Chinese stocks: We believe that Chinese stocks are an opportunity for long term investors looking for asset growth, substantial income and de-correlation with western markets. With attractive equity valuations and earnings upgrade expectations, we believe mainland Chinese and Hong Kong equity valuations are bound to substantially increase within the next 12 months.
Japanese yen: The JPY is extremely undervalued, with USDJPY close to its all-time high of 150. The anticipated change in BoJ’s monetary policy in 2024 could trigger a rapid yen re-appreciation of 20%.
Nuclear energy: We believe the nuclear sector will be instrumental in the world’s decarbonization efforts. To achieve fossil fuel reduction targets, the nuclear power industry’s safety standards need to be brought to the next level, for instance by using new technology to recycle uranium. New “green” nuclear energy is the number one priority of President Macron in France, while being high on the agenda in the US and China, which will build 150 nuclear power plants in the next 15 years.
Defense and security: The wars in Ukraine and Palestine have triggered massive investment in military defense and the overall security sector – including cyber, food, energy, and semiconductor supply security – in Europe and around the world.