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Navigating market volatilities in February

stock market investor

Caution Advised as Wall Street Bulls Face Potential Bull Trap amid Fed's Stance on March Rate Cut

Despite a positive monthly close, doubts loom over Wall Street's bullish momentum as some US big tech earnings failed to meet expectations for the AI-driven rally. The Federal Reserve's disagreement with a prematurely anticipated March rate cut, as stated on February 1, has added to investor caution. This skepticism and potential profit-taking could contribute to a market correction this month.

Tech earnings in the US were uneven, with Bespoke statistics revealing that "Tech stock was up just 0.4% versus the sector’s gain of 3.9%". While the S&P 500 saw a 1.6% increase in January, 7 out of 11 sectors witnessed a decline in average stock value. Notably, Tesla plunged by 25% in January, making it the worst performer in the S&P 500, while Nvidia and Netflix experienced gains of 24% and 16%, respectively.

Nvidia's quarterly earnings, anticipated later this month, are poised to be a significant event for Wall Street. As a leading AI chip manufacturer, Nvidia's performance is often considered a barometer for the tech sector, influencing market sentiment following a record year in the AI-backed tech rally. On the macro front, the US monthly Consumer Price Index (CPI) remains a focal point, providing insights into the Fed's future rate path.

Australian Market's Record High: ASX Braces for Earnings Season with RBA's Rate Decision Looming

In Australia, a record-high ASX in January was propelled by cooler-than-expected inflation data, fostering optimism for the Reserve Bank of Australia (RBA) to pause rate hikes for the second consecutive month. The RBA's upcoming rate decision holds paramount importance for overall market sentiment. Unlike the US, where tech stocks led gains, the financial and energy sectors were the primary contributors to ASX's positive performance. Expectations for a housing market rebound and rising energy prices fueled these sectors. Should the RBA adopt a dovish tone, local equities may sustain their upward momentum in February.

Following the conclusion of the US market's earnings season, the ASX is set to unveil its half-year and full-year company results later this month. Major players such as CBA, Australia's largest lender, will release its 2023 full-year earnings after reaching a record high. Results from prominent mining companies - BHP, Rio Tinto, Fortescue Metals, and Pilbara Minerals - will offer insights into the sector's business health amidst ongoing economic challenges in China, influencing commodity prices. These major earnings typically drive market volatility, accounting for approximately 22% of the ASX market cap.

Earnings season aligns with the Chinese New Year holiday in China

Despite the Chinese government's efforts to stimulate economic growth, sluggish domestic demands and a struggling housing market continue to weigh on stock market performance. The CSI 300 Index extended a six-month losing streak to a five-year low, and the Hang Seng Index slumped over 9% in January. February may bring a glimmer of hope as China enters the Lunar New Year holiday season, marking the second Spring Festival since lifting Covid lockdowns at the end of 2022. Increased domestic travel and spending are anticipated, reflecting a rebound from the previous New Year's Covid-related challenges. Additionally, Alibaba and Baidu, two Chinese tech giants, are set to report their fourth-quarter earnings this month, providing a crucial gauge of consumer spending and business health in the country.

RBNZ's Upcoming Decision and NZX's Performance

Turning to New Zealand, NZX rose by 0.9% in January, reflecting an 11% gain since its low in October 2023, mirroring movements on Wall Street. The potential downside risk lies in a hawkish Reserve Bank of New Zealand (RBNZ) rhetoric at its upcoming policy meeting this month. Despite cooled inflation, the RBNZ has maintained a hawkish tone on its rate path. Chief economist Paul Conway's speech in January pushed back against Official Cash Rate (OCR) cut bets, emphasizing the bank's decision to keep the OCR at 5.25% for the fourth consecutive time in November. While expectations lean toward another "hold" at the upcoming meeting, the tone will be instrumental in shaping market sentiment. A temporary lift in the New Zealand dollar may occur if a hawkish stance prevails, but prolonged higher rates could eventually harm the local economy and weigh on the currency.

Gold Nearing All-Time High amid Fed's Decision and Economic Data

The prospect of gold testing an all-time high looms in February as the US dollar weakens post the Fed's decision on February 1. Despite resistance to March rate cut speculations, Chairman Powell's indication that the interest rate may have peaked suggests potential rate cuts later this year. This could press the US dollar lower, accompanied by a decline in government bond yields. Debates persist on the timing of the first cut, with the CEM Fed Watch Tool pricing in a 57% chance of a May rate cut by the Fed. Economic data, including the US non-farm payroll, CPI, and ISM manufacturing PMI, will remain focal points for investors predicting the Fed's policy path. A cooler CPI, rising unemployment rate, and manufacturing PMI contraction could increase the likelihood of an earlier rate cut, consequently boosting gold prices.

Oil Market Challenges Amid China's Economic Woes and Record US Production

Two major bearish factors continue to impact oil markets: China's economic slowdown affecting demand outlook and record-high US oil production. Despite signs of easing tension in the Red Sea Israel-Hamas conflict, oversupply concerns persist, potentially putting downward pressure on crude oil prices. The OPEC+ decision to maintain the output cut at 2.2 million barrels per day for the first quarter of this year implies no expansion on production cuts by the cartel. China's economic challenges and robust US production may continue to pose challenges for oil markets.

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