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Interest rates could set the tone for equities

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Carlsquare
10 Jan 2024 | 4 min read
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Sugar prices have been under pressure from unforeseen events in major producing countries such as Brazil and India. However, weather changes in Brazil and increased demand for biofuel alternatives have put some upward pressure on the sugar price again. We believe that investors are looking at interest rates to see where the stock market is going in the near future.

Case of the week: Sugar looking like a sweet start to 2024

Sugar futures came under pressure during the end of 2023, dropping to little over 20 cents/LB. With the Brazilian real depreciating, promoting further exports over domestic crushing, supply was shored up. Expectations of India retaining sugar for use in ethanol production boosted the price further, so when the scheme was dropped the price declined further. For sugar in the beginning of 2024, there might be more room up rather than down.

In terms of raw sugar harvest, Brazil had a strong 2023. According to Unica, the accumulated sugar production, until December 16, was just under 42 million tonnes in the south central region, a 25.2% increase compared to the previous period. The corresponding numbers for other regions were 28 million tonnes in the Sâo Paulo region, a 25.0% increase YoY, and just under 14 million tonnes in the other Brazilian states, a 25.4% increase YoY. The percentage of sugarcane crushed and turned into white sugar was also higher, reaching just over 49% in the south-central region, as compared to 46% in the previous year. Taken together with the fact that the Brazilian real has depreciated the exports have been able to push down the sugar price to little over 20 cents/LB.

On the other side of the ‘sugar-world’, India has had production fail to meet forecasts. Largely due to the El Niño weather event, the abnormally dry and sweltering weather has had negative impacts on the sugar crop yields. Furthermore, more sugar was initially aimed at ethanol production rather than crushed into white sugar. When the policy was rolled back, sugar prices reflected the expected increase in the supply accordingly.

In summary heading into 2024, sugar has recently bounced off a support level at 20 cents/LB. Although sugar production is expected to increase, there might be more potential for sugar to increase in price, rather than decrease. While the weather has been near perfect in Brazil for the later half of 2023, dips in rainfalls in the beginning of 2024 has already resulted in some upward pressure in the price. Further strong demand for biofuel alternatives like ethanol also generates upward pressures in price and is expected going forward into the new year.

Sugar Mar 2024 (US cents/LB), one-year daily chart

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Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Sugar Mar 2024 (US cents/LB), five-year weekly chart  

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Source: Barchart. Note: Past performance is not a reliable indicator of future results.

Macro comments

The US employment report on Friday 5 January showed that non-farm payrolls rose by 216,000 in December, leaving the unemployment rate at 3.7%. Ahead of the report, economists had expected a gain of 170,000 jobs and an unemployment rate of 3.8 per cent. On the negative side of the report, the number of new jobs in October and November 2023 was revised down by 71,000 and the rate of wage growth was slightly higher than expected.

US Treasury yields rose and then fell after Friday's employment figures. Compared to the days before Christmas 2023, the two-year US Treasury yield is still around 4.3%. After the strong US employment report, the focus will be on US inflation (CPI) on Thursday 11th and producer prices on Friday 12th of January. A continued downward trend in inflation is important for the stock market to continue to rise.

Friday 12th January marks the start of the Q4 2023 S&P500 earnings season with quarterly results from Bank of America, BlackRock, Citigroup, Delta Airlines, JP Morgan Chase, UnitedHealth Group and Wells Fargo.

For Q4 2023, the estimated earnings growth rate (year-over-year) for the S&P 500 is 1.3%. Wall Street analysts have lowered their earnings estimates for Q4 2023 in part due to company guidance, as they forecast earnings growth of 8.0% as of 30 September 2023. But for 2024, Wall Street analysts have raised their earnings growth forecast for S&P500 companies to 6.0% for Q1 2024 and 11.8% for FY 2024. This is illustrated in the chart below, where the price of the S&P500 has outperformed long-term EPS growth.

SP500 Price vs EPS 10 YR.jpg

Rates to decide the next move?

Rising interest rates put a temporary end to the rally and the S&P 500 broke below the MA20. On Monday the 8th of January, the index received a boost from dovish comments from a Fed member. The day closed back above the MA20, but the EMA9 is falling. Also, the soft sell signal on the MACD is a bit worrying. In order for the stock market rally to continue, interest rates must continue to fall. Currently, both the 2-year and 10-year US Treasury yields are rising.

S&P 500 (in USD), one-year daily chart

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Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

S&P 500 (in USD), weekly five-year chart

spx 5 yr01-24.JPG
Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

MACD has also generated a soft sell signal for Nasdaq 100.

Nasdaq 100 (in USD), one-year daily chart

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Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Nasdaq 100 (in USD), weekly five-year chart

ndx 5 yr0124.JPG
Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

OMXS30 is currently stuck under MA20. As for the two US equity indices, MACD has also generated a soft sell signal for OMXS30. Risk is on the downside, with support around 2,300.

OMXS30 (in SEK), two-year daily chart

omx 1 yr0124.JPG
Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

OMXS30 (in SEK), weekly five-year chart

omx 5 yr0124.JPG
Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The German DAX has been consolidating under positive but falling momentum for some time. Perhaps the indices mentioned above faces a similar development

DAX (in EUR), one-year daily chart

dax 1 yr0124.JPG
Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

DAX (in EUR), weekly five-year chart

dax 5 yr0124.JPG
Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The full name for abbreviations used in the previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence

Risks

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