If the 10-year yield on US treasuries (10YUST) is able to ease towards 4.07%, there is a chance that the 50-day moving average (now at 4.12%) crosses below the 200-day moving average at 4.07% in a negative move. A negative signal for the 10YUST should be good for equity markets.
The first Federal Open Market Committee (FOMC) meeting is during the week of Jan 29 - Feb 2, on Feb 1. Economists will be watching the Federal Reserve minutes closely but any hints of cuts or easing are unlikely to materialise. Ironically, of concern is strong US GDP growth coupled with a strong US equity market.
“There is very high certainty that the Fed will keep to its policy stance unchanged in the upcoming meeting. The US growth momentum coupled with the still resilient US labour market reinforces our expectation for the Fed to keep its current Fed Funds Target Rate (FFTR) unchanged at 5.25-5.50% through mid-2024 where we forecast three 25 bps of rate cuts, one each in Jun 2024, 3Q2024 and 4Q2024 respectively,” says UOB Global Economics and Market Research.
The People’s Bank of China, on the other hand, could well continue its easing cycle when it meets on Feb 20, on the back of a weak economy and weak equity market. “The PBOC lowered the interest rates of relending and rediscount supporting agriculture and small firms by 25 bps to 1.75% on Jan 25, and will cut financial institutions’ reserve requirement ratio (RRR) by 50 bps effective from Feb 5. Thus, it is likely the benchmark rates including the 1-year medium-term lending facility (MLF) rate and consequently the 1-year and 5-year loan prime rates (LPR) will also fall. We have expected the 1-year and 5-year LPRs to drop by 10 bps to 3.35% and 4.10% respectively by end-1Q2024 but a larger cut is now more plausible,” UOB Global Economics and Markets Research suggests.
PBOC easing and the RRR cut coupled with the proposed market stabilisation fund, should lead to a rally in the Hang Seng Index by Chinese New Year. Technically, the Hang Seng Index remains somewhat moribund. It needs to at least end the week above 16,000 to be able to neutralise the negative sentiment. Despite a more than 1,000 point rally during the week when the Hang Seng Index rallied to as high as 16,211 on Jan 25, from a low of a low of 14,794 on Jan 24, it ended at 15,952 on Jan 26.
The Straits Times Index rose just seven points week-on-week to end at 3,159 on Jan 26. Technically, the index held above the confluence of the 50- and 100-day moving averages at 3,136 and 3,151, as they converge. The convergence is a positive signal from the moving averages. Both quarterly momentum and annual momentum have turned up, and quarterly momentum has moved into positive territory. This suggests that the STI should continue to gain strength. Immediate resistance is at the flattish 200-day moving average at 3,196.
See also: STI steadies despite overbought US markets and rising US risk-free rates
The break above 3,150 earlier this month indicates a target of 3,330 which remains valid. Support stays at the breakout level.
