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Blinded by the Brilliance at the Tunnel’s End

Published 02/16/2024, 03:07 AM

The S&P 500 rebounded past the 5000 yesterday. This time, a mixed set of manufacturing data and a drop in US retail sales – which fell the most in almost a year – were brought forward as soothing factors regarding the dovish Federal Reserve (Fed) expectations. But if retail sales had remained strong, investors would’ve been as happy to see the US economy land soft.

We are coming to a point where the economic data becomes meaningless. Whatever the data prints, the US stock markets find a positive narrative to keep the rally going. It’s, of course, blind optimism; investors are blinded by the brilliance of the rate cuts at the tunnel’s end.

Today, the US will reveal the latest producer price update. The producer price inflation is expected to have slowed in January. And if it didn’t, it doesn’t matter.

What’s More Interesting Is That

This week only, we learned that two of the G7 economies entered recession: Japan and the UK. Japan lost its spot of the world’s 3rd biggest economy to Germany, while Germany is in the process of losing its status as the European growth engine. GDP growth per head in the UK hints that the recession started two years ago. Growth in the euro area remains anemic, on the other hand, as the Eurozone economies struggle with rising interest rates.

But when you look at the stock markets, the Stoxx 50 index traded at an ATH even though the fourth quarter earnings miss in the region haven’t been this bad for at least 4 years, according to Bloomberg. Meanwhile, the Japanese Nikkei index is closing in on a record high as well – the index is now at a spitting distance from the highest levels since the 1990s despite entering a recession in the second half of last year. Negative rates and the ultra-cheap yen keep stock prices running up a mountain.

But the global stock markets are not breathing on their own at this altitude. If the central banks pull out the oxygen support, parts of the market should come down tumbling.

In the FX

The US Dollar Index retreated to 100-DMA and sees support at this level. The EUR/USD tested its own 100-DMA resistance to the upside and sees resistance at this level. The USD/JPY bulls sit timidly above the 150 level, knowing that this is probably a peak, or close to a peak before the Japanese do something to reverse the selloff. And Cable makes repeated attempts below its 200-DMA and needs the dollar bulls to make a decisive move to the upside to continue its journey to the 1.25 level. Gold is back above the $2000 per ounce, but the positive pressure in the US yields will likely weigh on the yellow metal appetite and prevent the gold diggers from aiming for new highs as the Fed doves retreat, and Bitcoin is doing just fine. Nine Bitcoin ETFs that have been trading since early January have already amassed $10bn of inflows. And it’s just the beginning.

Elsewhere, oil bulls and bears are fighting near the 200-DMA. Trend and momentum indicators are in favor of a further push toward the $80pb. OPEC’s monthly report showed this week that not all OPEC members are delivering the promised production cuts. In a separate report, the IEA said that the global oil market may be in surplus this year because supplies outside OPEC are expected to increase by 1.6mbpd; the US, Brazil, Canada, and Guyana are pumping to fill in OPEC’s production gap. On the demand side, the IEA sees global oil consumption rising only 1.2mbpd this year, half slower than last year’s increase. The bulls need China to stand up and walk. Otherwise, the road will be bumpier above the 200-DMA.

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