Weekly Summary: Markets Are Ready for Interest Rate Hikes

The S&P 500 index rose by 2.0% to 4045 this week creating a counter buffer for the expected interest rate hikes by the Federal Reserve (Fed) and the European Central Bank (ECB) next week. The peak of the corporate reporting season is also close as Amazon, Apple, Alphabet (Google) and Meta Platforms (Facebook, Instagram) are going to deliver their Q4 2022 earning reports next week. Investors are trying to focus on positive reporting while ignoring the fact that many companies have missed even conservative analysts’ expectations. The number of such “misses” is far beyond the average.

Macroeconomic data, in contrary, is beating forecasts. The U.S. Gross Domestic Product (GDP) for Q4 2022 gave markets a big surprise at it came out to be 2.9% vs 2.6% expected. In combination with some improvements in business activity in the United States, where the service Purchasing Manger’s Index PMI was recorded at 46.6 points and manufacturing PMI at 46.8 points, these figures may seem quite positive. But this could be an illusion that will fade with just one look at the broader picture.

High GDP data is sitting on an elevated bar that the U.S. economy has to beat in Q1 2023 in order for the stock market to continue its upward climb. PMI figures are below the  50 point mark, which still points to a contraction of business activity over a period of seven consecutive months for services and for a third consecutive month for manufacturing, even if they are better than the previous numbers. A weak consumer sector contributes to a still high possibility of a recession.

However, any positive news next week may push the stock market up. The upside signals may be delivered by the Fed or ECB, Non-Farm Payrolls data, corporate reporting in the U.S., or even  news about positive discussions over government debt ceiling in Congress. Chinese investors, who will return to the market next week after the Lunar New Year celebrations, could also put some flavour to the market.

Technically, the S&P 500 index is within the upside formation with the primary target at 4100-4200 points. But it has now entered the reversal opportunity window that would be open until the Fed’s meeting next week. The index is close to the resistance level at 4080-4100 points that may become a battlefield next week.

Brent crude prices continue to assault the resistance level at $87-89 per barrel. The meeting of the Organisation of Petroleum Exporting Countries and its allies (OPEC+) on February 1 may push prices  in either direction. Technically, Brent prices are seen to be likely down, but OPEC+ has surprised markets many times before so it is better to be prepared for any developments.

Gold prices are moving inside the mid-term, upside formation with targets at $2000-2100 per troy ounce by the middle of 2023. Prices have largely exceeded the upper margin of $1880-1900 per ounce, hovering around $1948 per ounce. Odd price growth over the last week may suggest a further price rally to $1970-1990 per ounce without any stopovers, but also signal to a possible swift change of a trend to the downside during elevated volatility to rewrite last year’s lows. The realisation of either scenario may happen next week.

The money market is ready for the strengthening of the U.S. Dollar although it has ignored any upside signals for the American currency. Considering the high volatility in the market, it is better to place orders that are attached to longer perspectives. Short trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000 points below the opening level and the same 5000 points for a stop-loss order should be considered very attractive.