2022-10-30 Sunday Market Update

by | Oct 31, 2022 | Market Updates

Past Week’s News:

  • ECB raised interest rates by 75 points (in line with expectations)
  • US: GDP Lower than expected (2.60); then Service PMI (47.80), Manufacturing PMI (50.40) & Composite PMI (48.20), were in line with expectations
  • China: Xi Jingping Secured third term as head of the communist party (23/10)

Market sentiment:

In October, the markets have been experiencing a rally, and the average is a gain of 3.0%, however, this includes the dramatic fall of Hangseng, and without Hangseng, the average is a 5.29% increase.

This is reflected which we can see in the development of Fear & Greed, which has increased from 74% last week to 90% this week.

The question is whether this is a so-called bear market rally, which is more likely than not. If we look at the YTD index we see that the average is about an 18.88% decrease, which increases the chance for short-term rallies (more about this in Market Update below).

 

  • This Weeks Fear vs Greed 90% 90%
  • Last Weeks Fear vs Greed 74% 74%

Indices: 30 Days & YTD

Market Update: Indices

Comment: Indices

In the first summary above, we can see that all indices except for HangSeng have been increasing steadily since the 1-2 week in October. Most of the indices close near month high, and when compared with the box plots, we see that they are above the whiskers, which I have set to 95%. Therefore, in the short-term most indices are expected for some form of a reversal towards the mean. 

If we look at the next slide that shows the year to date many of the prices are still in a steady decrease and have been down at all-year lows, which strengthens the argument that this October rally is simply a bounce before continuing the trend. So this begs the question, if we are supposed to continue down, how much further?

Well, in this case, fundamental is key, and unfortunately, much of the expectations are on the central banks… At the moment, the economy is moving towards a recession, and the markets are not going to turn until there is some light at the end of the tunnel…

So if we zoom out and look at the last summary, which shows the past 10 years, we see that prices are moving closer to the means, but in many cases, the last price is still above the box, which means that we are still not close to some form of average price-level, and therefore, there is still a risk for further downside.

Lastly, HangSeng has been crashing in October, and in the 10 Year chart, we see that this is the only index down at the bottom. Reason? Well, much uncertainty in Hong Kong and China. Some part of the Covid-policy, other parts the re-election of Xi Jinping, which makes Hong Kong unattractive for companies and wealthy individuals. We have seen an outflow towards other places like Singapore, and what can be seen in the index development is likely a reflection of this uncertainty.

 

Market Update: Rates

Comment: Rates

For rates, we can see that respective rates (5 years, 10 years, and 30 years) are climbing and towards their peaks. Although, recently there has been a short decline in await of comment from the FED next week (FOMC Rate Decision on Wednesday 2/11). There has been some speculation that there might be a pivot coming, however, given the recent market rally, there is less reason for the FED to pivot this early.

Next week we will find out.

 

Market Update: FX

Comment: FX

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).

This month, probably due to the increase in markets and FED pivot expectations, we can see that the USD has lost some traction. However, if we zoom out and look at the YTD graph, we can see the incredible rise in USD vs other currencies this year. 

I can agree that some of these charts look “toppish” and that when zoomed out, it looks like USD has reached a top in some of the charts. However, be careful, because when it comes to currencies vs currencies, they can go further than expected… Especially now when the current decline is probably based on the FED rumors… 

Another graph that stands out is the EURGBP chart, or well, all charts containing the GBP. 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

Finally, commodities, the rollercoaster of 2022…  

Many have been expecting that due to the inflation, stagflation, war, and recession, that this should be the start of a commodity cycle similar to the commodity boom of the 70s. However, given everything that is happening in the world,  supercycle? 

If we look at the YTD graph, it looks a lot like booms and busts of speculation… some things stand out and have me confused.

For example, gold… what happened? This is supposed to be the safe bet in times of crisis, but it has decreased by about 9% (in USD). A 9% decrease is better than most indices, and when you take into account the value increase in USD, then investors in eg EUR might have a positive gain on their positions. 

Two other commodities that are confusing are oil and natural gas… these are trading at levels equal to, or the same as they were during the invasion of Ukraine. They have been increasing in the time between here, and they are also a big part of inflation in Europe and the US, but still would be expected to trade higher. For now, the US is using its reserves to keep oil prices down (probably due to midterm elections coming up soon (8/11)).

And the final confusing commodity is Wheat, which also has been causing speculation. Wheat is also trading at February levels, although it is highly likely for a food shortage this winter/spring of 2022. 

Maybe the answer to all above is that most people did a similar analysis, then bought the commodities for speculations, they reach a top, the bubble burst, and now they are coming down because traders are exiting their positions, and that is why we are now back where we started this year… 

But given that, there is still a lot of uncertainty ahead, and it is a good idea to think about what this uncertainty might mean for these commodities (which are hard assets – I e needed for everyday life). And then one might think about if there is going to be a new supercycle like the 70s, and then what is needed to set this off?

Summary:

  • October rally, most likely a bear market rally
  • Rates have been going down in anticipation of the FED meeting (FOMC)
  • USD has been going down this month but still 2022’s winner
  • Three commodities are confusing, but still, maybe not… 

Next Week:

  • 2/11 – FOMC Rate Decision (FED)
  • 3 & 4/11 – Lagarde Speaks
  • 4/11 – Non-farm Payrolls