The New Year holidays are often a good time to reflect and reset investment ideas. The markets in the US have reached record highs. The Federal Reserve, after increasing rates from 0.25% to 5.50% has finally moved to a dovish tone, whilst core inflation remains stubbornly high at 4%. In the currency markets the USD has spent the last two months on its knees with AUD/USD finally providing some good returns. In the commodity markets, the prospects for Oil remain mixed, the continuing conflicts in the Ukraine and Middle East making investors exceptional nervous about its outlook and if bullish the potential to reignite energy inflation.  Gold has rallied back above US2050 regaining its safe-haven status. Soft commodities are looking “bid” on the back of a volatile climate outlook, especially for wheat and base metal levels are perhaps providing the most realistic picture as to what the global economic picture is actually looking like. So, as we start 2024, we have decided to focus on the base case for the economy and few opportunities that we feel will show some good dividends throughout the year.

But first to set the scene, Federal Reserve Jerome Powel’s last words for the year set a cautionary tone for 2024. Recent economic indicators suggest that economic growth has slowed, job gains have moderated but remain strong, and the unemployment rate has remained low. Inflation has eased but remains elevated. GDP growth for the end of 2023 is expected to be higher at 2.6% yet for 2024 it has been scaled back to 1.4%. GDP dropping back to 1.4% doesn’t sound all that promising to kick off the New Year especially when you are expecting Fed Funds rates to ease back by 75bpds to 4.6%.  So why are equity markets at record highs?  We can only think that it is a result of expectations of easing, end of the financial year and that we are about to enter into a Presidential Election year where historically the S+P, 20 times out of the last 24 elections years since 1928 have a rallied. This is assuming the statue of play is normal, but this election is far from normal especially when you consider the states of Maine and Colorado have banned the Republican front runner former President Trump from being on the ballot due to his involvement in the “insurrection” Jan 6, 2021. Add to the volatile political picture, a temporary budget funding mismatch that has not be resolved, a market that thinks the Fed will be more aggressive in lowering rates due to poor growth and inflation that is stubbornly high it makes it hard to justify historic highs in equities. Plus, we have not even considered other global macros at play.

The wars in the Ukraine and Middle East, a legacy from 2023 that many believe will not be resolved anytime soon have the potential to create massive instability in the energy markets. Russia is the second largest oil and natural gas exporter in the world, whilst seven of the largest OPEC producers are Muslim influenced. Of these Saudi Arabia is the top exporter and Iraq ranks at number three. Either way, all three have significant sway on supply of global energy should they wish. The situation in Ukraine seems to be stubbornly contained, the situation in the Middle East is not, with more battle fronts opening up. Oil seems to be trading at a bifurcation point with slowing consumption offsetting geopolitical risks. However, should geopolitical risks increase then prices will be driven higher, and this could see a resurgence of energy inflation in most countries. A result that the Federal Reserve would be hoping would not occur. The ramifications of a high price for energy potentially sees interest rates remaining elevated for longer which also sees a weaker economic outlook. This is a preferred outcome especially when GDP is looking weak and with heightened geopolitical concerns and potential for a resurgence of inflation.

So, in summary for Q1, we feel that geopolitical unrest in the Ukraine and the Middle East will provide support to “risk on” trades until some clarity on a resolution is presented. As such, Central Banks will adopt a cautionary tone to easing monetary policy. The Federal Reserve’s new dovish rhetoric remains; however, our view is that interest rates will remain higher for longer, this could create some nervousness in the equity markets as corporate profits erode. Any easing will come later in the year perhaps more towards Q4 and a total of 75bps easing in 2024 is too aggressive. There is no reason for the USD to fluctuate outside US90 -110 so pick the extremes, with our preference to sell rallies. The energy markets will remain better bid and gold remains interesting as it is holding onto US2000 and stabilizing above at the historical levels which is a bullish sign. 

So, outside the general markets what are the top five trades we like for Q1 and the main argument as to why we like them:

AUD/USD:

Fundamental:

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Technically:

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Silver:

Fundamental:

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Technically:

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DJIA:

Fundamental:

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Technically:

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We would like to wish you all the very best for 2024 and happy trading.