Eurozone Contracts, Investor Optimism Boosts Junk Debt Market

Global manufacturing faced challenges at the end of 2023, as Eurozone activity contracted for the 18th consecutive month in December. Various factory purchasing managers' indexes indicated a persistent slowdown, signaling a potential delay in any recovery.

Eurozone factories ended the year with contraction, with Germany, the largest economy in the bloc, experiencing a decline in manufacturing activity. This trend raised concerns about a recession, given the Eurozone's 0.1% contraction in the third quarter. The heads of European Union institutions called for a strengthened euro and progress towards a capital markets union, emphasizing the need for cooperation amid challenges like geopolitical tensions and the climate crisis.

The U.S. dollar strengthened, reaching a two-week high against major currencies, driven by elevated U.S. Treasury yields and a cautious turn in risk sentiment. The dollar's rebound followed a previous monthly decline and its first yearly loss since 2020. Geopolitical tensions, including the drone strike killing of Hamas deputy leader Saleh al-Arouri in Lebanon, contributed to a risk-off mood, impacting currency markets.

The U.S. federal government's total public debt surpassed $34 trillion for the first time, as reported by the U.S. Treasury Department. This milestone, reached amid rising deficits and political challenges, raised concerns about fiscal responsibility. Congress faced upcoming deadlines for government spending and potential funding battles.

Investor optimism regarding potential interest rate cuts by the Federal Reserve breathed new life into the junk debt market, providing relief to lower-rated companies. Expectations of a more accommodative monetary policy led to increased demand for high-yielding debt, with junk bond spreads tightening. Creative financing strategies, such as distressed exchanges and extending debt maturity, contributed to a relatively low expected default rate, despite potential risks.

The U.S. economy showed positive signs at the beginning of 2024, with higher consumer spending during the holiday season, real wage gains, and increased consumer confidence. The White House Council of Economic Advisers highlighted improvements in inflation trends and anticipated positive economic indicators. However, geopolitical risks, such as the conflict in Ukraine and disruptions in the Red Sea, remained on the radar.

U.S. construction spending rose less than expected in November, but upward revisions for the previous month suggested underlying strength in the sector. The construction industry benefited from strong activity in the single-family housing segment and initiatives to bring semiconductor manufacturing back to the U.S. Despite challenges, the economy appeared to regain stability, with expectations of positive contributions from the housing market to GDP in the fourth quarter.

The Atlanta Federal Reserve anticipates that the fourth-quarter GDP growth for 2023 will increase at an annualized rate of 2.3%, following a robust 4.9% growth in the third quarter. The government is set to release its preliminary estimate for fourth-quarter GDP later this month. Policymakers indicated that lower borrowing costs are expected in 2024.

Data for Technical Analysis (15Min) CFD EUR/USD

Resistance : 1.0938, 1.0941, 1.0944

Support : 1.0932, 1.0929, 1.0926

15Min Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.0928 - 1.0932 is touched, but the support at 1.0932 cannot be broken, the TP may be set around 1.0941 and the SL around 1.0926, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0938 - 1.0942, TP may be set around 1.0950 and SL around 1.0930, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0938 - 1.0942 is touched, but the resistance at 1.0938 cannot be broken, the TP may be set around 1.0932 and the SL around 1.0944, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0928 - 1.0932, TP may be set around 1.0924 and SL around 1.0940, or up to the risk appetite.       

Pivot Points Jan 04, 2024 07:27AM GMT

Sources: Investing 1, Investing 2