We should expect an election year of elevated geopolitical tensions both domestically and internationally in 2024. Additionally, it’s still unclear how likely it is that the Fed will use interest rates to steer the American economy toward a safe landing. Furthermore, a worldwide recession is still a possibility.
Octa has examined two possibilities for the movements of the world financial markets in 2024 and analyzed the important variables.
We have witnessed the world central banks battle with inflation in 2023. Global inflation is currently less than 5%, down from almost 10% in the summer of 2022 due to interest rate hikes by central banks around the world. Increasing asset return needs have also become a burden on the world economy as a result of rising interest rates.
We should expect an election year of elevated geopolitical tensions both domestically and internationally in 2024. Additionally, it’s still unclear how likely it is that the Fed will use interest rates to steer the American economy toward a safe landing. Furthermore, a worldwide recession is still a possibility.
We have therefore looked at two possible scenarios for market behaviour. The baseline scenario would mark a resumption of global growth, so we consider it positive. The non-basic scenario implies the realisation of most economic and geopolitical risks—so it can be called negative.
Baseline scenario—soft landing
The optimistic scenario is predicated on the persistence of improving macroeconomic data, with central banks beginning to reduce interest rates as a result of falling inflation. In this instance, the U.S. Federal Reserve decides to gradually lower the key rate after pausing it until the June meeting. As a result, given the uncertainties, fixed-income assets (government and other bonds) and stocks will be less in demand in the first half of 2024, with defensive assets like gold and bitcoin taking precedence.
Because business cycles are surpassing economic cycles, early in March there will be a worldwide asset rebalance. The Federal Reserve’s meeting on March 19 and 20, which will include an overview of economic forecasts and corporate data during earnings season, is most likely to be the catalyst for investors.
Global financial markets are primarily driven by the U.S. economy, but developments elsewhere in the world should also be taken into account. Europe’s industrial sector is expected to moderately recover as macroeconomic indicators improve, and the labor market in the United Kingdom will also likely improve.
In the latter part of 2024, the Japanese Central Bank might declare its plan to increase the benchmark interest rate. All of this will be accompanied by a reduction in geopolitical tensions in the areas of military conflict.
‘The tactics of traders’ actions imply working on the uptrend of gold and bitcoin from the beginning of the year to mid-March—the period before the two-day meeting of the U.S. Federal Reserve’, said Kar Yong Ang, Octa’s financial market analyst. ‘From late March to early April 2024, traders should sell the U.S. dollar in all major currency pairs’, added Kar Yong Ang.
Non-basic scenario—recession is not excluded
The employment situation plays a crucial role in deciding whether the economy transitions from a soft to a hard landing. In this instance, we shall observe how the economy has been unable to withstand excessive interest rate increases, even as inflation has stabilized. This keeps having a negative effect on bond issuance yields, which ripples across the entire financial system. Labor costs are typically reduced by corporations, which leads to a further drop in consumer expenditure.
The flywheel of high interest rates will cause a notable increase in consumer credit, mortgage delinquencies, and unemployment rates by the middle of 2024. The focus will shift from the consumer to the corporate sector in the second half of 2024, and then to macroeconomic data. This is because company revenues typically fall sharply toward the end of the year, and unemployment is on the rise.
It is anticipated that by September 2024, the state of affairs would be so clear-cut that central banks will resume their long-postponed quantitative easing (QE) program to assist businesses and the labor market. Furthermore, the Bank of Japan is unlikely to change course and maintain its negative interest rate policy in such a scenario, which will provide insight into the dynamics of the USDJPY in 2024. Geopolitical tensions persist alongside the destabilization of the global economy.
‘Due to high-interest rates, investors will continue using defensive assets until September 2024. Traders’ tactics should be based on this—betting on stable growth in gold, oil, gas, bitcoin’, said Kar Yong Ang, Octa’s financial market analyst. ‘After the September events, the uncertainty increases significantly, as the effect of hypothetical QE will not be immediate. In addition, the final of the U.S. election race makes the picture even more unpredictable, he added.
The path taken by both scenarios from early 2024 until mid-March is the same. Market dynamics can therefore be classified as either risk-on or risk-off. In any of the situations outlined in 2024, having an awareness of the underlying trends and a grasp of future patterns could present a profitable trading opportunity.
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