2023 wrap-up and what to look ahead in 2024?

2023 wrap-up

2023 has been a year of surprises, with a strong bull market in Wall Street predicted by little at the start of the year. The unfolding of the US banking turmoil in March and the Israel-Hamas conflict in October have also thrown some volatility into the equation, but despite the rocky journey, major US indices managed to bounce back from last year’s losses to deliver their respective all-time highs.

This follows as the macro environment took a turn for the better, with earlier calls for recessions drowned out by soft-landing hopes while promising inflation progress and the dovish shift in Federal Reserve (Fed)’s rhetoric led market participants to look forward to a series of rate cuts in 2024.

Year-to-date performance among asset classes revealed a clear lean towards risk-taking, with stellar returns in the cryptocurrencies space and semiconductors. The S&P 500 is up more than 25% for the year, alongside gold prices (+13.3%), with the weaker US dollar and lower Treasury yields serving as bullish catalysts to ride on.

On the other side of the performance table, Chinese equities remain the laggard. Market participants continue to struggle in finding the conviction that the worst is over for China’s economy, amid the country’s on-and-off recovery momentum since reopening. The Hang Seng Index (HSI) is down 17% for the year - a stark divergence from other global indices in double-digit gains. Oil prices also took a dip in the red (-5.6%), with its 2022 stellar gains unwinding on a softer demand outlook and easing supply-demand deficit.

As we head into 2024, here are three key themes to keep an eye on.

Dovish Fed narrative has markets pricing for six rate cuts in 2024

Attempts from Fed officials to downplay rate-cut prospects after its recent policy meeting have failed to sway market expectations of having six rate cuts in 2024, which is significantly more dovish that what US policymakers have guided (three cuts in the latest dot plot). Further pushback from Fed officials could be on the cards in 2024, but until the trend in inflation reverses to revive a high-for-longer rate outlook, market participants may continue to find comfort in prevailing inflation progress.

What to watch: US dollar

The US dollar has been hammered since November this year, with a more dovish-than-expected Fed translating to a five-month low in the index. While the broader trend remains downward bias, one may argue that the US dollar is heading towards a support zone in the near term, which may call for some defending on oversold technical conditions. Any attempt to rebound may also support the formation of a bullish divergence on its daily moving average convergence/divergence (MACD). The 100.50 level may be immediate support to hold, followed by the 99.15 level next.

What to watch: Gold

Gold prices have been resilient this year, despite the US interest rate registering its highest level in more than 22 years. Strong central banks' demand and safe-haven flows from geopolitical tensions have been supportive of prices, and a different course of rate outlook from this year could set the stage for catch-up buying, given that broad positioning from money managers and exchange-traded funds (ETFs) is still largely leaning towards neutral.

A renewed move back above the US$2,074 level of resistance could suggest buyers in broad control. Prices trading above its Ichimoku cloud zone on the daily chart since October this year may leave the broader upward trend intact, with prices potentially looking to retest the US$2,146 level next. On the downside, support may be presented at the lower channel trendline and the Ichimoku cloud zone, along with its 100-day moving average (MA).

Can China’s economy regain its footing?

While there are some pockets of strength presented in China’s economic conditions, overall recovery has been largely uneven, as property sector woes proved to be a longer-than-expected drag while consumer sentiment and spending remain reserved. Softer global demand and prevailing geopolitical tensions just add to the list of economic obstacles, with the International Monetary Fund (IMF) projecting that its gross domestic product (GDP) growth could slow to 4.6% in 2024 from current 5%-5.4% range.

While policy easing has in some ways worked its way into the economy, it seems clear that a sustained policy support into 2024 is much needed to keep the growth momentum going.

What to watch: Hang Seng Index (HSI)

It has been a struggle for the HSI this year, with a touch of its one-year low while unwinding more than 80% of its November 2022 reopening gains. A broad descending wedge pattern remains in place, with the formation of lower highs and lower lows reflecting much shunning from market participants. Any upside may potentially find resistance at the upper wedge trendline around the 18,200 level. On the weekly chart, greater conviction of a trend reversal to the upside may have to come from a move back above the key psychological 20,000 level, where the weekly Ichimoku cloud resistance resides. The index has failed to cross the Ichimoku cloud zone since July 2021, leaving it as crucial resistance to overcome.

Policy normalisation from the Bank of Japan (BoJ)

The BoJ has been taking intermittent steps towards policy normalisation this year, loosening the shackles on its 10-year yield target and guiding for more policy flexibility with a softening of its wordings/language. Further steps to exit from its ultra-accommodative policies are likely to continue in 2024, as policymakers remain on the lookout for any sustained increases in inflation and wages. While communications of a policy-pivot timeline from BoJ officials remain muddled, broad market expectations are priced for Japan to scrap its negative rates in the second quarter of 2024 (after Japan’s wage negotiation season).

What to watch: USD/JPY

The trend for the USD/JPY may have reversed to the downside this year, with the pair breaking below its Ichimoku cloud support and its key 100-day MA for the first time since April 2023. A breakdown of a channel pattern in place since the start of the year also adds to the bearish trend, with the pair seemingly setting its sight to retest the 139.54 level next. Thus far, its daily relative strength index (RSI) struggled to cross back above the key 50 level, which leaves sellers in greater control for now.