Q2 Market Outlook:
FOREX.com Analysts Remain Cautiously Optimistic
Dubai, 10 May 2023– There’s no doubt that 2023 has been lively so far. Equity and commodity traders were quick to rejoice on news of China’s reopening in early January, whilst Yen traders were treated to an out-of-meeting policy adjustment which gave currency markets a jolt. And whilst geopolitical tensions have somewhat receded, they have now been replaced with fears of contagion and central bank pivots. Monitoring market trends on a daily basis, FOREX.com’s seasoned analysts have built insightful reports that detail their forecasts for the second quarter of the year. Here’s a summary.
Oil & Gold: The Outlook Remains Bullish
For most of the first quarter, WTI ranged between $70 to $83. Yet, recent market turbulence surrounding the implosion of Silicon Valley Bank (SVB) pushed oil prices to a 15-month low. Currently, the oil’s upside potential would be capped by slower growth and high inflation, while its downside potential would be capped by OPEC’s willingness to support prices with a break into the $60s; demand and supply dynamics, especially that China’s reopening continues to support demand; and the possibility of central banks cutting rates eventually, which might push the WTI up to the $90+ range.
For gold, FOREX.com analysts remain bullish on the commodity for Q2, but they confirm that things are not going to be simple. Headline risks remain a key driver for gold, which makes it more of a trader’s than an investor’s market for now. The gold’s inverted relationship with bond yields and the US dollar are as strong as ever as the debacle surrounding Silicon Valley Bank and concerns over contagion played out. However, if appetite for risk improves and central banks remain hawkish, gold might hand back its recent gains. Central banks, China and India are expected to continue to provide support for gold and the futures curve remains in contango, illustrating confidence that prices may go up. In a nutshell, upside risks for gold include safe-haven flows, softer inflation and lower interest rate, while downside risks include risk-on environment, higher inflation and higher interest rates.
FOREX: The USD Has Seen Better Days
FOREX.com analysts maintain an overall bearish view on the dollar, as the market seems to believe that the Fed will be less aggressive than anticipated. But for the dollar to regain buying strength against its rivals in Q2, another acceleration in the inflation rate might be needed. Yet, a contractionary Fed policy with higher rates could hurt the housing market and provoke job cuts in the tech sector raising unemployment rates, potentially halting the economy and leading to rate cuts. Another threat for the USD is the debt ceiling debacle, as funding has been secured until the end of the second quarter, but after that, it is possible that the US government might default on its obligations.
Accordingly, the dollar is likely to remain under pressure on the short term, with expectations for the EUR and GBP to outperform. Consequently, FOREX.com analysts envisage a revisit toward 1.1000 on EUR/USD and 1.2500 on GBP/USD.
To bring back a strong dollar, there must be a fundamental change that triggers a breakout above key resistance between the 104.63 to 105.80 area on the Dollar Index, which may happen if the US economy continues to outperform or financial markets witness a sustained period of risk-off environment.
Indices: Are Things Clearing Up?
In the US, rate hikes are starting to slow down. The Nasdaq has outperformed the Dow Jones so far, and may continue to do so in the coming quarter. Buyers will look for a rise over 13,200 near term to extend gains to 13,725, while sellers will look for a break below the 11,000 year-long trendline support.
In the Eurozone, economy is looking more resilient than forecasted with inflation expected to fall slowly, especially with the ongoing economic rebound in China, a key trading partner for Germany. However, risks persist. The banking sector remains under the spotlight in the wake of the collapse of SVB and the UBS acquisition of Credit Suisse. For the DAX, the longer-term rise is losing momentum. Sellers could look for a fall below 14,000 and 13,700 to take the next step lower. Meanwhile, buyers would need to rise above 16,000 to create a higher high.
Similarly to Europe, the economic downturn in the UK is expected to be lighter than initially feared, with PMI data showing activity returning to growth as of March 2023. While inflation remains stubbornly high, the BoE expects consumer prices to start falling across as interest rate hikes take effect. The BoE is expected to slow rate hikes this quarter and potentially start cutting rates around the turn of the year. This, however, will not be sufficient to bring back traders’ full confidence.
While the FTSE could find support from miners, heavily-weight banking stocks could remain under pressure in the near term. Given FOREX.com analysts’ slightly bullish stance towards GBP/USD across the year, the multinationals which make up over 80% of the FTSE 100 could also be pressured by a less beneficial exchange rate. Looking ahead, the FTSE could struggle to make fresh record highs beyond 8,000.
Macroeconomics: Good Start Doesn’t Mean Positive Outlook
The first two months of 2023 painted an optimistic picture for global economic prospects, with the IMF’s World Economic Outlook highlighting that worst-case scenarios have been averted. In its Q1 update, the IMF predicts 2.8% growth for the global economy this year, with strong growth projected in Asia and Africa, while surging interest rates, concerns about banks, and war take a toll on growth in the Euro area (0.8%) and the US (1.6%). As FOREX.com analysts projected in their full 2023 Market Outlook reports, inflation seems to have peaked across the developed world. Normalizing supply chains, market adaption to the ongoing Russia-Ukraine war, and rapidly rising interest rates appear to have kicked off a disinflationary process, till now. Economists, however, broadly agree that monetary policy impacts underlying economic activity with a lag, not to mention that there are early signs of stress in developed markets’ banking systems, illustrated by the failure of major US and European banks.
Big Tech: Are all Tech giants performing the same?
Following the recent publication of quarterly earnings reports by some of the largest publicly-listed Big Tech companies, including Alphabet, Microsoft, Meta, Amazon and Apple, Wall Street anticipates it will be another tough quarter for Big Tech earnings. According to Bloomberg consensus numbers, Microsoft is the only member forecast to report EPS growth (merely +0.7% year-on-year) after suffering falls in the last two quarters, while the rest of the group are anticipated to report another quarter of declines, especially Meta with a diluted EPS forecast (YoY) of -26.8% compared to -6.3% for Apple and -3.4% for Amazon.
The index to watch this Big Tech earnings season remains the Nasdaq 100, considering these 5 giants collectively make up almost 43% of the index. Big Tech stocks have all booked in strong gains since the start of 2023 (to the end of play on April 18), driving the Nasdaq 100 over 20% higher. Still, according to Bloomberg data, there’s a notable divergence in terms of valuations. Meta is trading at a discount to the wider market in terms of blended-forward price-to-earnings ratio (BF PE ratio) and Alphabet is underperforming, while Microsoft and Apple prompted markets to give them premium valuations, and Amazon stands out as it continues to prioritise growth over profitability.
According to Ritu Singh, FOREX.com Regional Director says: “Caution is needed in the running quarter, and the outlook across all markets may show once again that traders might need to diversify their portfolio to avoid placing all their eggs in one basket and running big risks on one single market”. She added: “At FOREX.com, we offer a wide range of financial products to meet different traders’ preferences and expectations, including Forex, Cryptocurrencies, Indices, Stocks, Commodities, and Precious Metals. Our team is always ready to assist traders in making informed decisions based on their latest market analyses, and with our extended hours for major US stocks, we enable them to trade the possibilities as soon as they reveal themselves.”
Read the detailed reports on www.FOREX.com
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