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Key themes for investors this week

Economic data, Opec+ decision and others set the tone for investors

As the last month of the first half of 2024 kicks off, financial markets worldwide find themselves at a critical juncture. Economic data reveals a mixed picture, with signs of easing inflation tempered by ongoing concerns about growth and the potential for further policy tightening. Central banks grapple with diverging paths, while oil prices remain sensitive to production decisions.

A string of economic data this week is likely to set the tone for investors moving forward, analysts said.

Macroeconomic data

The strongest indicator will be the US monthly nonfarm payrolls report, which will give investors an idea of the state of the world’s largest economy. The report’s findings could influence the Federal Reserve’s decision-making regarding rate cuts or hikes. This is of critical importance to investors in the UAE as the dirham is pegged to the US dollar, and the UAE Central Bannk’s rate decisions mirror that of the Fed.

The Fed expects gross domestic product (GDP) growth to remain resilient and maintain a level above longer-term expectations. Similarly, Fed policymakers do not foresee unemployment rising materially over the next several years despite the tightening they put in place. “In our opinion, with initial jobless claims increasing to the highest level in quite some time, comprehensive labor market surveys may be overstating job growth. Thus, the labor market will be a key focal point for us in the near term,” Edward Perks, Chief Investment Officer, Franklin Income Investors, wrote in a note.

Staying on rates, the European Central Bank and the Bank of Canada are expected to lower borrowing costs as inflation cools. The outlook beyond June remains uncertain due to sticky inflation in the services sector, a faster-than-expected economic recovery, and accelerating wage growth, analysts said.

Damian Hitchen, CEO, Saxo Bank Mena, said: “Investors this week will likely focus on political developments, with attention on the historic election of Claudia Sheinbaum in Mexico, exit polls favouring Modi’s party in India, and South Africa’s ANC courting rivals after losing its majority. These outcomes could shape regional policies and market sentiments. Overall, themes revolve around political stability, energy dynamics, and monetary policy direction, guiding investment decisions across various sectors and geographies.”

Fixed income

Corporate bond yields rose to elevated levels in 2022 after their decline to historical lows in 2020. “Since then, yields have been what we consider very attractive relative to what we’ve seen in the last decade and a half. For instance, coupons for investment-grade corporate bonds (currently our preferred sector within fixed income) have been around 5.5 per cent.5 In our opinion, this could provide a good opportunity, particularly as we think about extending duration and potentially benefiting from a longer-term normalisation in interest rates,” Perks said.

The global high yield last year saw stellar returns in the 12 per cent to 13 per cent area in US dollar terms. Analysts believe that kind of performance is going to be extremely hard to replicate this year. “However, there are a lot of good things going on within global high yield. Companies have very strong fundamentals that are supported by strong global macroeconomic conditions. And there is a lot of demand for global high-yield bonds right now that is outstripping the amount of supply that is coming to market. This will support valuations and we think that you will get around a 5 per cent to 7 per cent type of return in 2024,” Tim Crawmer, director and global credit strategist at asset management firm Payden & Rygel, said.

Crawmer sees the best opportunities in the banking sector. “We found that a lot of the subordinated rated securities from the stronger systemically important banks globally are offering valuations that are attractive versus other non-bank high-yield issuers. A lot of that is because people still have bad memories about what happened with Credit Suisse last year. And that has kept valuations on the cheap end, and we see opportunities there currently,” he added.

Crude oil

In the commodities market, the decision by the Organisation of Petroleum Exporting Countries and its allies, collectively known as Opec+, to prolong oil production cuts well into 2025 has sent ripples through the global oil market, prompting mixed reactions and raising questions about its impact on prices, market share, and the dynamics within the producer group.

In the short term, the extension of cuts is likely to support oil prices, potentially pushing them higher. The reduced supply could create a tighter market, especially if global demand remains robust. However, analysts suggest the market had already priced in some of the cuts, limiting the immediate price impact.

In the longer term, the picture is less clear. “While the cuts could keep prices elevated, the gradual unwinding of voluntary reductions signals Opec+’s intent to balance the market and avoid excessive price spikes. Additionally, factors like global economic growth, geopolitical tensions, and the energy transition could significantly influence oil prices in the coming years,” Mohamed Hashad, Chief Market Strategist Noor Capital, said in a note.

The decision to extend cuts could impact Opec+’s market share in both positive and negative ways. On one hand, maintaining production discipline could strengthen the group’s position as a dominant player in the oil market. On the other hand, prolonged cuts could incentivise non-Opec producers, particularly shale oil producers in the United States, to ramp up production and capture market share, Hashad said.

Gold

Gold prices dipped below $2,325 on Monday morning after two weeks of decline, briefly touching $2,314 before rebounding. Expectations that the Federal Reserve will cut rates later this year, along with easing inflation in the US, have weakened the US dollar, supporting gold. Geopolitical risks also contribute to this support.

However, gold’s gains are limited by a generally positive market sentiment and hopes for a cease-fire in Gaza. Traders are cautious ahead of key economic data releases this week.

“If gold continues to decline, bearish sentiment could push prices below $2,300, targeting the May low near $2275. Further weakness could see prices drop to $2,225-35 zone. Conversely, if buyers drive gold past the 50-day simple moving average (SMA) and above $2,340, it could spark a rally toward $2,360. Surpassing this resistance could invalidate the bearish outlook and push prices towards $2,380 and potentially $2,420,” Vijay Valecha, Chief Investment Officer, Century Financial, said.

Crypto

In cryptocurrencies, Bitcoin saw a modest uptick in price on Friday, as traders remained cautious ahead of pivotal US inflation data expected to influence the interest rate outlook. However, the cryptocurrency still retained significant gains for the month of May.

The token remained within a trading range established since mid-March, largely due to fears of high interest rates dampening its price outlook and that of the broader crypto market. Recent remarks from Federal Reserve officials expressing doubts about the easing of inflation have reinforced these concerns.

Factors like US BTC-spot ETF market flow trends, anticipated central bank policy easing, and positive US political developments are driving the upward trend.

Bitcoin is trading at $69,117, showing a nearly 2% increase, exhibiting a bullish Bitcoin price prediction. “The price action features a bullish engulfing candle around $68,500, indicating buying interest, and a bullish EMA crossover at $68,100, suggesting continued upward momentum. The pivot point is $68,342, supported by an upward trendline. Key resistance levels are $69,543, $70,610, and $71,494, while support levels are $67,311, $66,650, and $65,932,” Valecha said.