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Forex Market Analysis: Record Highs in the US and a Prolonged Rout in Chinese Equities 23 Jan 2024

January 23, 2024

Forex Markets Analysis: 23 Jan 2024

CURRENCIES:

  • The NASDAQ, S&P 500, and Dow Jones have all achieved new record highs, signaling a complete reversal of the recent stock market dip from December to early January.
  • In Japan, the Nikkei 225 has hit a fresh 34-year high, while China’s Hang Seng is experiencing ongoing weakness, attributed to a battle between the Federal Reserve (Fed) and the financial markets.
  • The Fed is attempting to talk down interest rates, but market expectations for rate cuts persist, leading to a positive overall sentiment despite some success in lowering rate cut expectations.
  • A “Fed blackout period” is currently in effect, with no speeches or comments from Fed members expected ahead of the FOMC meeting on January 31st, creating a quieter news period related to the Fed.
  • Turning to the US dollar, it is trading around a 50% retracement level, with the 200-day and 50-day moving averages serving as significant support and resistance levels.
  • The US Core PCE, the Fed’s preferred measure of inflation, is anticipated to be a major event for the dollar during the week, potentially influencing its performance.
  • In the Eurodollar market, trading within small ranges is supported by the 200-day simple moving average, and upcoming factors such as the German and Eurozone PMIs, along with the ECB monetary policy meeting, could play a crucial role in shaping Eurodollar performance in the coming week.

STOCK MARKET:

  • The ongoing equity rout in China has led to an unprecedented $38 trillion gap between the market capitalization of the US stock market and that of Hong Kong and China combined, setting a new record.
  • Michael Liang, Chief Investment Officer at Foundation Asset Management HK Ltd., notes that while China presents value, the lack of catalysts is hindering its performance, while the US market benefits from momentum and a favorable economy.
  • Global investor sentiment toward China is painted negatively as steep losses continue, contrasting with US stocks that have reached record highs, fueled by a technology rally and optimism about potential Federal Reserve interest rate cuts.
  • Since February 2021, Chinese stocks have witnessed a loss of over $6.3 trillion in market value, while US equities have gained $5.3 trillion over the same period.
  • Doubts over Beijing’s long-term economic agenda and strategic competition with the US are contributing to what started as a performance-driven exodus potentially becoming a structural shift.
  • Bloomberg strategists, including Kumar Gautam, suggest that China’s correction might continue, estimating a 51% probability of the MSCI China Index trading below its peak for an average of 35 months.
  • Despite the prolonged rout, some investors see potential for a technical rebound due to attractive valuations. The MSCI China Index is now 60% cheaper than the US equity benchmark based on earnings-based valuations.
  • The MSCI Inc.’s key gauge for Chinese equities trades at about eight times 12-month forward estimated earnings, significantly lower than the S&P 500 Index’s 20 times.
  • Currently, there is little indication of an end to the challenging start of 2024 for Chinese equities, with a gauge of Chinese stocks listed in Hong Kong already losing 13%, making it the worst-performing major global benchmark index in less than a month.
  • Chinese stocks listed in Hong Kong already losing 13%, making it the worst-performing major global benchmark index in less than a month.

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