2022-11-06 Sunday Market Update
Past Week’s News:
- US: FOMC – 0.75-point increase (highest since 2008) – FED hawkish and no pivot
- US: Non-farm payrolls: +261,000 (+195,000 expected)
- US: Unemployment rate: 3.7% (3.6% expected)
- UK: Aims to raise taxes and raises interest rates as well
- EU: Lagarde states that a mild recession will not stop the interest rate hikes, and also warns for a supply-chock
- China: Sticks with its zero covid-policy
Market sentiment:
New month, no pivot from FED, and hawkish news from Lagarde… However, the markets have been taking it fairly well so far. We can see that the markets are still going up in the spirit of the Octobers rally, even though with less strength.
The Fear vs Greed has come down from 90% to about 54%, and the 30 days average is up to 4.25% including HangSeng.
VIX has started to come down below the yearly median, however, if we look at the 10 Year VIX graph we can see that it might temporarily pause to recharge before increased volatility closer to December/Year-end.
- This Week’s Fear vs Greed 54%
- Last Week’s Fear vs Greed 90%
Indices: 30 Days & YTD
Market Update: Indices
Comment: Indices
In most markets we can see a short downturn around the FOMC, however, most markets ended the week strong.
The market with the best rebound was without a doubt HangSeng, after being pressured the week before. However, HangSeng is still the clear loser in the YTD and 10 Year graph, so has it reached a bottom, or will it continue down? Well, unfortunately, China announced that they are going to stick with its zero covid-policy, which means that HangSeng will continue its downward path…
Furthermore, we can also see an increase in FTSE100, where the markets seem pleased with the new governance of the UK, and the opposite direction compared to the Truss-regime.
My guess, when looking at the charts is that this October spike is not a bottom, but instead a bear market rally, and I would not be surprised to see the markets turn negative in the next 1-2 weeks.
However, we have the mid-term election on Tuesday (8/11), which might be a catalyst for either up or down continuation. But my guess here is that after the midterms, there is no incentive for the Democrats to keep the markets high until the real presidential campaign begins, therefore a likely scenario is that the markets top this rally around here (+5 days) and then continue down (with the exception for a few short-term winter rallies) until end winter / early spring (when the report seasons begins).
Market Update: Rates
Comment: Rates
Now after FOMC, we know that the 0.75-points became real, taking rates to the highest since 2008, and will likely continue. After the announcement, rates jumped up after declining on the pivot-roomers. It is worth remembering that mixed signals are coming from FED… At some point, FED tries to soothe the markets and give hints about a possible pivot, but at the same time, they stick to their opinion that they need to get inflation under control, and will therefore continue with the rate hikes.
Market Update: FX
Comment: FX
Similar to last week, the USD stays strong against most currencies and rebounded after the FOMC. However, against the JPY, the USD seems to weaken. This strengthened JPY comes from the recent interventions from BOJ where they state that in case the USD will strengthen against the JPY, they are going to intervene.
On the other side of the coin, when rates are going up, this tends to strengthen the USD (I will do an in-depth analysis of this in the future).
Once again, another graph that stands out is the EURGBP chart, or well, all charts containing the GBP. Here the turbulence after the Truss-regime has led to a sharp decline in the GBP and then rebounded after the resignation of Truss. This should serve as a reminder that even major currencies can be subject to extreme spikes and volatility, and create outlies many standard deviations from the expected outcome.
I believe no one has missed the current turbulence in their parliament, and this also proves my point above, that the recent spike in EURGBP can wipe out many stop-losses. Therefore, it is important to keep an ear on the track when it comes to FX and try to anticipate any rapid (and unexpected) changes.
Market Update: Commodities
Comment: Commodities
I wrote more thoroughly about commodities last week (which can be read here), however, we can see that after the FOMC, most commodities (mainly metals and not really wheat) have increased, and are trading over their weekly mean and median.
As I mentioned last week, the expectation is that commodities should enter a supercycle like the one in the 70s, so if you look at the YTD graph, do you think it looks like a bottom (after this year’s speculation bubble) and that last week’s spike is the start of a new rally, or do you think commodities will continue to decline?
If I would guess, I still believe in an increase in commodities, because I do not see that inflation is correctly reflected in the current prices. Also, there is a war going on that effect both energy prices and is going to affect food supply. However, is it now it starts? I believe that we can soon see a rally in commodities (probably as a reaction to markets declining after the midterms), however, if this is the much-awaited supercycle, I don’t know.
Summary:
- October rally continued into November, and Indices ended last week strong. However, is this a short-term rally that is going to end after the mid-terms, and lead to further decline?
- How will HangSeng and other indices react to China’s continuation of its zero covid-policy?
- FOMC raised rates by 0.75-points, which led to a strengthened USD (against most currencies except JPY)
- Commodities also increased after FOMC, however, is this the beginning of a new rally?
Next Week:
- 8/11 – Midterm election
- 8/11 – CPI (US inflation)
- 9/11 – CPI (China inflation)