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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Lower than estimated October US inflation across both the headline and core on m/m basis lifted equities yesterday with S&P 500 futures up 5.5% and Nasdaq 100 futures up 7.5%. The pricing of the Fed’s terminal rate mid next year also came down below 5% again and the US 10-year yield plunged to 3.8%. Big moves are normal during downtrends (equities below their 200-day moving average) and while the move was significant it shows stretched positions and the urge for the pivot rather than definitive change in the market. It is also worth noting that the US Services excluding Energy subcomponent of the inflation index was up 0.5% m/m with the 6-month average at 0.6% (stuck there for five months now) suggesting inflation is building in the services sector.
Hong Kong’s Hang Seng (HSIX2) and China’s CSI300 (03188:xhkg)
Hang Seng Index soared 7.3% on the post-CPI rally in the U.S. stock market and fine-tuning of pandemic control measures in China. Following a meeting of the Chinese Communist Party’s new Politburo Standing Committee, China’s health authorities issued 20 guidelines to optimize pandemic measures, relaxing quarantine and PCR testing requirements, and prohibiting excessive lockdowns. The CSI 300 Index climbed 3.8%.
FX: Massive dollar selloff in the aftermath of the US CPI release
The Dollar Index saw its greatest losses in a single day since 2009, falling to lows of 107.7 after the release of the softer-than-expected US CPI, which are being re-tested following the announcement of China easing its zero covid policies overnight. The biggest gainer on the G10 board in the US session was JPY given its yield-sensitive nature and the plunge in US yields of about 25-30bps in the 2-year and the 10-year, with USDJPY slipping to lows of 140.21 before a recovery to the 141+ levels in Asia. If we do see hawkish Fed comments in the coming days/weeks and a move back in terminal rate pricing to 5%+, some of this rally in the JPY is likely to be unwound but overall, the trend in USDJPY remains biased to the downside now with most of the interest rate expectations already priced in by the market. GBPUSD was also a big gainer as it surged to the £1.17 handle, but a test lies ahead with UK GDP release today likely to confirm the onset of a recession (read preview below). AUDUSD extended its rally to 0.66+ levels on double bonanza of weaker USD and China reopening trade pushing commodity prices higher, with AUDNZD also surging back above 1.10. The euro could be targeting €1.035, after successfully breaking through several layers of resistance, one of them now offering support at €1.0095.
Crude oil (CLZ2 & LCOF3) higher amid weak dollar and China hopes
Crude oil extended yesterday’s weak dollar-led rally overnight after China announced some easing of its strict Covid zero strategy. The move to cut quarantine for inbound traveller and scraping a system that penalizes airlines for bringing virus cases into the country occurring during a major outbreak, and it will only strengthen the view the government is moving towards a general easing sooner rather than later. Brent has been pivoting around $95 this week and while it may continue in the near term, the risk of higher prices remains, with a softer dollar being added to the list of supportive factors.
Industrial metals surge on US inflation print and China Covid news
Copper trades near a five-month after extended yesterday’s weak-dollar driven rally by reports coming out of a Politburo Standing Committee meeting that suggest Beijing would take more targeted measures to avoid damaging to the economy (see below). The first visible step being the move to cut quarantine for inbound traveller and scraping a system that penalizes airlines for bringing virus cases into the country. The Bloomberg Industrial Metal index has surged 11% during the past two weeks on China reopening hopes and a weaker dollar. Copper, already supported by tight supply, has surged 12% during this time and at $3.85 the price is getting close to the important $4 level which, if broken, could signal a turnaround.
Gold and silver break key levels as rally accelerate
Gold is heading for its biggest weekly gain since March after the weaker-than-expected CPI print gave metals a major boost from the subsequent drop in yields and the dollar. The yellow metal trades up 7% during the past two weeks and the break above resistance-turned-support at $1735 may now change the trading behaviour among speculators from a sell-into-strength to buy-on-weakness. We maintain our long-held bullish view, primarily driven by expectations of a major repricing when the market realises long-term inflation will settle at a higher level than the sub 3% currently being priced in. ETF investors – net sellers for months - and speculators in the futures market now hold the key that could unlock further gains. Expect some consolidation and potentially a recheck of support at $1735 with resistance at $1765 and $1789
Bloomberg reports a balance sheet hole of $8bn for FTX. Likewise, the Wall Street Journal reports that Alameda Research owes FTX about $10bn. Reuters says that the loan to Alameda Research was equal to at least $4bn. Sam Bankman-Fried (SBF), however, went to Twitter to give an explanation. He goes on to talk about two major mistakes that he has made, one being that he underestimated the demand for sudden liquidity by clients withdrawing funds. In terms of liquidity, SBF further says that: “FTX International currently has a total market value of assets/collateral higher than client deposits (moves with prices!). But that's different from liquidity for delivery--as you can tell from the state of withdrawals. The liquidity varies widely, from very to very little.” Remember, that this is contrary to the story by Bloomberg and likely the Wall Street Journal and Reuters story. It now seems plausible that FTX has a serious hole in its balance sheet”, though, hard to judge anything at this stage given the number of rumors and unconfirmed information floating around. What remains clear is that any liquidity event will unlikely remain isolated as cascading margin calls and contagion effects are likely to be felt beyond the crypto space.
US treasuries (TLT, IEF)
US Treasury yields (10Y) reacted strongly to the lower October US inflation figures with the yield dropping to 3.8% and the Fed’s terminal rate pricing also came down below 5%. It has been estimated that the move yesterday across markets caused the biggest easing in financial conditions in many years, which is the exact opposite of what the Fed wants to see, so this move can easily be faded over the coming weeks. Investors must remember that it was just one data point on inflation.
What is going on?
Soft(ish) U.S. October CPI
The October U.S. consumer price index increased less than expected by the economist consensus. It jumped 0.4 % on the month and is up 7.7 % on a year ago basis. Core inflation, which is highly monitored by market participants, increased 0.3 % on the month and 6.3 % over the past twelve months. This is still uncomfortably high for the U.S. Federal Reserve. However, it seems to confirm that inflation is slowly slowing down in the United States. On a flip note, the labor market remains in a fine spot. U.S. jobless claims were up to 225k (+7k) versus expected 220k in the week ending on 5 November. Continuing claims were also higher at 1.493.000 (+6k) in the week ending 29 October. This should not have much influence on the trajectory of the U.S. monetary policy in the short term.
Richemont blasts estimates
The Swiss-based luxury maker reports first-half operating income of €2.72bn vs est. €2.33bn on revenue of €9.7bn in line with estimates. The better-than-expected operating margin is a strong signal for investors amid inflation and was driven by strong performance in the watches and jewelry categories.
China issued 20 new optimization guidelines to relax its dynamic zero-Covid policy
China’s health authorities released 20 new guidelines to optimize the country’s pandemic control measures on Friday after the Politburo Standing Committee, led by President Xi, held a meeting on Thursday to discuss on how to best contain the pandemic. While the statement from the meeting reiterated adherence to the dynamic zero-Covid policy, it highlighted the push for vaccination and treatments and called on government officials to be scientifically targeted and precise in implementation and avoid doubling down on each layer of execution. The key measures in the guidelines released today include reducing the number of quarantine days, relaxing some centralized quarantine to home quarantine, limiting PCR testing, prohibiting excessively extending lockdowns, promoting vaccination and treatments, and prohibiting local authorities from shutting down production, schools, and transportation without proper approval.
Fed speakers pushed back on the market rally
The kind of market reaction we have seen on the soft US CPI print confirms that investors remain on the edge regarding the timing of a Fed pivot. This can prove to be counterproductive, as easing of financial conditions can derail this downtrend in inflation and reverse the less hawkish path that Fed is expected to take in the coming months. The Cleveland Fed’s Loretta Mester said that, while she was encouraged by October’s data, she sees bigger risks from tightening too little than too much. Kansas City Fed President Esther George said monetary policy “clearly has more work to do”, while the Dallas Fed’s Lorie Logan said earlier that inflation has a long way to go before it reaches the central bank’s target. They also noted it may be time to slow down the pace of hikes, however, but that it shouldn’t be interpreted as easing policy. Equally importantly, WSJ's Timiraos tweeted, "The October inflation report is likely to keep the Fed on track to approve a [50bps rate hike] next month. Officials had already signaled they wanted to slow the pace of rises and were somewhat insensitive to near-term inflation data". Easing financial conditions will likely drive the Fed speakers to a further hawkish tilt in the coming days.
US jobless claims still underscore a tight labor market
Initial jobless claims rose marginally to 225k from 218k, and above the expected 220k. Meanwhile, continued claims also exceeded consensus to print 1.493mln (exp. 1.475mln) from, the revised higher, 1.487mln. While this continues to show a tight labor market in the US, it may be worth watching how it moves in the coming months especially after the wave of tech sector layoffs that we have seen in the past few weeks.
What are we watching next?
UK GDP to confirm the onset of a recession
UK’s Q3 GDP is scheduled for release today and the first quarterly negative print of the current cycle is expected to be seen. Consensus forecast is seen at 2.1% YoY, -0.5% QoQ, significantly lower than the second quarter print of 4.4% YoY, 0.2% QoQ. August GDP data had already begun to show a negative print with -0.3% MoM and the trend will only likely get worse in September, exacerbated by a one-off factor relating to Queen Elizabeth II’s funeral in the month, which was a national holiday. The economy is already facing a cost-of-living crisis, and both fiscal and monetary policy must remain tight in this very tough operating environment. Technically, a recession may still be avoided as activity levels picked up in October, but still, it will remain hard for the UK to dodge a recession going into 2023. This suggests there may be some downside for the sterling, especially as the market refuses to cater to the Bank of England’s warning that the current expectations of terminal rate may be too steep.
Earnings to watch
The only meaningful earnings release today is from Richemont (see review above), but we will post next week’s earnings releases in our earnings note on analysis.saxo later today.
Economic calendar highlights for today (times GMT)
1500 – University of Michigan expectations (inflation and economy)