2022-12-11 Sunday Market Update

by 11 Dec, 2022Market Updates

Past Week’s News:

  • US: PPI 0.3% (expected 0.2%, previous 0.3%)
  • US: PMI Service 46.20 (previous 47.80); Manufacturing 47.70 (previous 50.40); Composite 46.40 (previous 48.20)
  • US: Consumer Confidence 59.1 (consensus 56.9, previous 56.8)
  • UK: PMI Service 48.80 (previous 48.80); Manufacturing 46.50 (previous 46.20); Composite 48.20 (previous 48.20)
  • China: CPI 103.30 (previous 103.50) 
  • China: PPI 111.70 (previous 111.60)
  • China: PMI Service 46.70 (previous 48.40); Manufacturing 49.40 (previous 49.20); Composite 47.00 (previous 48.30)
  • Euro Area: GDP Growth Rate 0.30% (previous 0.80%); GDP Growth Annualized 1.30% (previous 3.20%) 
  • EU: Caps price on Russian Oil at 60 USD

Market Sentiment:

How will this year end? We are almost at the middle of December and this past week we can see that the rally that started in October has lost fuel and is possibly on its way down. But how far? 

Looking at the sentiment, we see that Fear vs Greed has dropped significantly since last week, and when we look at the net long positions, EUR/USD and Gold have stayed the same, while SP500 has increased to 50%. Given the market, I believe that this change indicates that we are in for a downturn. Usually when the net long increases, then the bigger institutions are preparing to let prices go down. A possible catalyst for this is the FOMC meeting on Wednesday (14th), that possible will give negative news to calm the market down (they cannot be too happy with the recent increase in the broad indices, and we can see that they are up on an average 5.88% (a lot of help from HangSeng’s recovery), and the YTD is about -12.88% with Nasdaq being the biggest loser (~30%).

We can see that the average volume is starting to increase, and it looks like VIX has turned after the recent low of sub-20. All of these components together tell me that it is very likely to see a market downturn before Christmas (which has been my main track since October). The question is how long it will last and how deep it will go… I would not be surprised if this downturn is going to give us new lows, and then possibly, the markets will be saved by the FED around the annual report season. But there are still a few months before that, and we need to take one signal at a time and be ready to adjust.

  • This Week’s Fear vs Greed 54% 54%
  • Last Week’s Fear vs Greed 73% 73%
  • SP500 Net Long 50% 50%
  • Last Week’s SP500 Net Long 43% 43%
  • EUR/USD Net Long 40% 40%
  • Last Week’s EUR/USD Net Long 40% 40%
  • Gold Net Long 71% 71%
  • Last Week’s Gold Net Long 71% 71%

Indices: 30 Days & YTD

Market Update: Indices

Comment: Indices

Now we can see some clear top formations in most markets, and given the negative trend, and that most markets were up and above their means, gravity forces are pulling them down. And thinking about it, we are in a recession even though it is not officially confirmed yet. Inflation is high and salaries are not following, energy prices are soaring in Europe, and the war is now advancing with the US giving Ukraine permission to start attacking Russian territory. So it is hard to get optimistic. However, next week we get US CPI, and after that FOMC will set the rates. This will likely determine next week, so the question is if the markets will start to go down before in anticipation, or after. Either way, be prepared for increased volatility.

 

US Sectors & Industries

Not too much to comment on here, and the sectors speak for themselves. Either way, I will create a new correlation matrix for the future that tracks different periods. However, in the coming two weeks I have finals, so this will probably be put on hold until around Christmas. 

 

Market Update: Rates

Comment: Rates

Rates have been calm and decreased when markets have increased. However, now as markets have reached a top, we can simultaneously see a bottom in rates. If markets go down, rates will go up, and of course an important factor next week is once again the FOMC meeting. 

Market Update: FX

Comment: FX

Feels repetitive, but to further strengthen the view of the coming market downturn and increase in rates, we should expect to see increased strength in the USD. FX is harder to see common patterns in because there are other dynamics controlling the FX market. But given the fundamental macro view, as soon as the markets turn down we should expect an increase in USD. However, due to the volatility of the FX market, and in many cases high leverage, I would be careful not to start to load on long USD positions until the other factors are confirmed. Eg lower CPI or positive signals from FED can make the markets spike in the opposite directions, and if unhedged, can lead to fast drawdowns. 

Market Update: Commodities

Comment: Commodities

A quick note about Gold… Gold looks great and as anticipated before, it is in a positive trend and should be expected to go up.

However, what I want to focus on today is the price of NaturalGas and Oil… We can see that NaturalGas is starting to increase, which is expected since the European winter has unfortunately started very cold. Given the EU’s energy crisis, we should expect energy-related commodities to increase by quite a lot. This is however becoming a real problem because the increasing energy prices are making it harder for European industries to compete globally, which is going to negatively affect the EU’s GDP.

Another weird thing is the price of Oil. First of all, oil is right now trading at YTD low, which is strange due to everything going on in the world. Yes, the US has helped stimulate oil prices by using its reserves, but not at this level. Another factor that might influence is the lower demand, as inflation gets higher and a fear of a recession might make both people and companies cut down on expenses and slow down production. And a final idea is the recent EU price cap of 60 USD on Russian oil. “The price cap on Russian oil will limit price surges driven by extraordinary market conditions and drastically reduce the revenues Russia has earned from oil after it unleashed its illegal war of aggression against Ukraine. It will also serve to stabilize global energy prices while mitigating adverse consequences on energy supply to third countries.” (SOURCE). 

We will see how these measures will play out and if this will provoke a reaction from Russia. 

Summary:

  • Markets have most likely topped since October’s rally, and maybe this week’s CPI and FOMC meeting will be the catalyst for a new market downturn.
  • Rates look like they are preparing to increase, in anticipation of the US CPI and Wednesday’s FOMC meeting. 
  • If markets go down and rates go up, we should expect a strengthening of the USD. 
  • Gold is looking great! However, given the coming EU winter, what we should look at is energy prices.

Next Week:

  • 13th Dec. US CPI
  • 14th Dec. FOMC Rate Decision (50 points expected)
  • 15th Dec. ECB Refinancing Rate
  • 15th Dec. Retail US & China
  • 16th Dec. Prel. PMI US, Euro Area, UK