Top Trade Ideas - February 24th
The global economy relies on NVDA earnings, right?
Over the past week, global financial markets have been rattled by a confluence of economic and geopolitical events, leading to heightened volatility and investor unease. In the United States, the Dow Jones Industrial Average experienced its most significant decline of the year, plummeting over 700 points on Friday, culminating in a two-day loss exceeding 1,200 points. A trio of unfavourable economic indicators precipitated the downturn: a consecutive monthly drop in consumer sentiment to its lowest since November 2023, unexpectedly weak existing home sales for January, and an unforeseen contraction in the services sector, which constitutes approximately 70% of the U.S. economy. These developments have intensified concerns about prolonged elevated interest rates from the Federal Reserve.
Concurrently, President Donald Trump’s announcement of a roadmap for implementing reciprocal tariffs on U.S. trading partners has injected additional uncertainty into the markets. While technology giants like Nvidia, Apple, and Tesla saw stock gains following the announcement, the broader market remains apprehensive about potential trade conflicts and their implications for global economic growth.
In Europe, political developments have further influenced market dynamics. Germany’s recent elections resulted in a victory for opposition conservatives and a notable surge in far-right support, outcomes that are poised to impact the nation’s economic policies, especially regarding debt limits and defence spending. Additionally, as the third anniversary of Russia’s invasion of Ukraine approaches, global leaders, including French President Emmanuel Macron and U.K. Prime Minister Sir Keir Starmer, are engaging in diplomatic efforts to address the ongoing conflict, with discussions encompassing trade, tariffs, technological collaboration, and strategies for resolving the Ukraine crisis.
Amid these developments, concerns about stagflation—a scenario characterised by rising inflation coupled with slowing economic growth—have resurfaced. Commodity prices, excluding oil, have been on an upward trajectory, with agricultural prices reaching decade highs.
Chart of the Week: The Citi US economic surprise index hit its lowest last week since September. This is usually a good leading indicator for yields.
The Week Ahead
The Federal Reserve’s preferred measure of inflation, the PCE price index for January, is due on Friday. This comes after consumer price inflation for February was much higher than expected. Analysts say the components of this data–and the subsequent producer-price data–which feed into the core PCE measure were less strong, suggesting inflationary pressures might not be as concerning as the CPI data suggest.
Still, it is unlikely that this or any other U.S. data in the coming week will shake expectations that the Federal Reserve won’t cut interest rates before fall at the earliest. U.S. money markets currently fully price a 25bps rate cut for September.
Further data include the second estimate of fourth-quarter GDP, durable goods data for January and weekly jobless claims on Thursday.
In Canada, GDP data for December and the fourth quarter are due Friday. GDP should have been boosted by recent unexpectedly strong retail sales in December. However, analysts remain cautious about prospects for the economy going forward due to the risks of the U.S. implementing hefty tariffs on Canadian imports.
In Europe, markets will begin the week scrutinising the results of Germany’s elections over the weekend. Analysts say if major traditional parties fail to secure a two-thirds majority, this could lead to concerns about whether the new government will be able to agree on fiscal stimulus.
In terms of data, the focus will centre on the release of provisional inflation figures for February from Spain on Thursday, then France and Germany on Friday.
Germany’s Ifo business climate index on Monday could confirm the optimism in the latest ZEW sentiment index. The breakdown of the fourth-quarter German GDP on Tuesday will provide insight into the strong and weak segments of the economy, while the final French GDP is due on Friday.
In equity markets, everyone will be watching NVDA’s blockbuster earnings on Wednesday. Estimates are for adjusted EPS of 0.842 and revenue at $38.261bn for Q4. Of course, the entire economy relies on this print…
Onto our market thoughts. If you’re a new reader, you can subscribe here to read each article in full. We’ll start with FX before moving to equity and commodity markets.
FX
USD/JPY broke below 150.00 last week for the first time this year. The chart below shows that February has seen the multi-month uptrend broken for the pair, with it facing strong horizontal support and a short-term price war around the 150 handle.
This week should provide us with a key move either way, with Tokyo CPI on Thursday. With inflation trending higher, JGB yields trading higher and a lack of pushback from officials on ruling out further rate hikes, we feel that the risk from the print (and in general momentum trading before then) is skewed towards a fast move lower on USD/JPY.
Downside option exposure is prohibitively expensive, so we play this at spot but acknowledge the high-risk nature of this trade.
TRADE IDEA - A USD/JPY BREAK LOWER LOOMS
Entry: 149.25
Stop Loss: 151.15
Take Profit: 144.75
Last week, we flagged that the break lower on USD/CAD was significant, but how the 100 DMA could catch and stall the pair in the short-term. This proved to be correct, with the pair trading sideways.