Welcome to the first market outlook report for 2024! The market moves have remained relatively range-bound during the first two weeks of the year, and we will highlight the critical price levels to watch as we head into 1st quarter of 2024. Before we continue, we must start with the most important price in the market, the federal funds rate.
The market made a sharp U-turn off the risk-off sentiment last year in October after the Federal Reserve (Fed) hinted that they will start cutting the federal funds rate from the 2nd quarter of 2024 with rates currently on pause between 5.25% – 5.50%. The soft-landing seems to be on the cards with growth slowing marginally while the Fed starts its victory lap around inflation, on paper.
Here is a critical chart that highlights that turbulence and crises in the financial markets have occurred after the Fed’s rate pause which then forced the Fed to step into the markets as the lender and buyer of last resort to inject liquidity and bring stability to the markets. History does not repeat itself, but it often rhymes.
The chart shows the difference between the US10-year yield and the short-term US02-year yield. As you will notice the yield curve is deeply inverted and the only way for the Fed to fix this is to pull down the yields on the short end of the curve, dropping the Federal funds rate. At the bottom of the chart is the federal funds rate, notice how every “pause” has been followed by financial crises since the dot com crises.
That wraps up the short history lesson and let this chart simmer for a while and keep it on the back burner when you hear and read optimistic soft landing market reports revolving around the Fed’s expected rate cuts. Back to the markets, the headlining event so far has been the Securities Exchange Commission’s (SEC) approval of the Bitcoin ETF. The bitcoin price action has been relatively muted so far regarding the news and it is shaping up to be a sell-the-news event in my opinion.
Additionally, the US released their latest CPI results for December. The US CPI for December printed higher than expected at 3.4%, up from 3.1%, year-on-year which somewhat dampened the Fed’s inflation victory narrative last week. The US labour market is however still showing resilience with the non-farm payrolls data for December coming in at 216 thousand, up from 173 thousand.
Moving over to the emerging markets, China injected $50 billion worth of stimulus into their policy banks. Foreign direct investments dried up in 2023 and the PBoC is desperate to ignite growth in the country this stimulus could bode well for industrial commodity prices which are currently in a bit of a slump.
FDI chart
Looking ahead to next week the headlining data print is the 4Q2023 China GDP results along with the latest CPI figures from the Eurozone and the UK but expect markets to remain timid until the Fed rate decision. Let’s now jump into the charts for those crucial levels to watch for the 1Q2024.
First up is the US 10-year yield. The critical levels to watch are the 200-day MA level of 4.072% and to the downside the 61.8% Fibonacci retracement rate of 3.843%. A sustained risk-on sentiment which will only be driven by the re-enforcement of the Fed’s rate cuts will see yields break below the support at 3.843 which could allow for a deeper drop towards 3.500%. Weakening of the current hopeful risk-on sentiment will however see a break above 4.072% and allow yields to climb higher towards 4.500%.
The dollar index is a tough one to call now. The 50-day MA has crossed below the 200-day MA which is a bearish technical indicator but there is also a degree of divergence on the RSI which contradicts the MA cross. Our critical level to watch is the 61.8% Fibonacci retracement level of 102.49. A break above this level, off the back of a dampening of the risk-on sentiment, will allow the DXY to inch higher to test the 200-day MA level of 103.42. A failed break above our critical level will however see the DXY drop back onto the December low of 100.92. The risk sentiment is currently entirely dependent on the Fed’s rate projections.
Time to get local with our ailing ZAR. The rand had a rough 2023, which saw our local unit depreciate just over 7% against the dollar. Things may very much be more of the same in 2024 unless commodity prices put on a sustained rally along with easing monetary policy from the Fed.
Zooming in on the USD/ZAR, the pair is currently being squeezed by its 50-day MA at 18.58 and its 200-day MA at 18.66. A break out of this range will indicate to which side the pair will break out of the current wedge pattern highlighted by the black trend lines while 18.33 remains the critical support rate. A failed break below 18.33 will be an early sign that 1Q2024 will be a tough start for the rand. A break below 18.33 will however allow the rand to pull the pair below 18.00. One positive indicator for the pair is the fact that the 50-day MA has crossed below the 200-day MA.
There have been some shake-ups in the world of oil, apart from the ongoing conflict in the Middle East. Angola, Africa’s third largest oil producer, opted to leave the OPEC cartel earlier in January. OPEC seems to be losing control over the oil price and their ongoing production cut measures have seemingly become too much to bear for Anglo. Over to the price action, the critical level to watch now is the 50-day MA price of $79.06 per barrel. A failed break above this resistance level will see increased tension in the Middle East and a price drop towards $70 per barrel.
The last chart we have for the week is Bitcoin. The major news regarding the approval of the bitcoin ETF but the SEC is shaping up to be a sell-the-news event as mentioned earlier with the divergence on the RSI deeming it as a supportive indicator for my statement. Bitcoin however tends to hit markets when they least expect it. For now, the currency is being supported by the 50-day MA of $42,600. A break below this level could see bitcoin tumble back down towards $38,000 and possibly lower onto the 200-day MA at $33,000. Optimism is running high though and if the price holds above the 50-day MA we may very well see a fresh all-time high for the currency in the 1H2024.
