a week littered with landmines

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Risky assets put on a show on Friday, but I can’t help but think that improving sentiment may come up against some headwinds this week.

An open mind to a change in market structure is always beneficial and as we strive to assess the risks and potential outcomes, the market will do what it wants to do, and we react dynamically to flow and price.

The “peak rates” trade as well as the dovish turns of the RBA, BoC and ECB were traded well. Despite weak earnings from several tech mega-names, we saw the S&P500, Dow Jones and Russel 2000 index break sharply higher.

Dovish rhetoric from the ECB has helped EU equities perform well and price momentum is strong. A significant tightening of 26 bps (to 2.07%) in the Italian 10-year BTP and German 10-year Bund spread over the week, a key gauge of sentiment in the region, also helped. That said, with various inflation prints from the EU ahead (German CPI print 11.6% vs. 10.9% observed), and the CPI print for the wider EU region is expected to rise to 10 .3%, this may lead one to wonder if the ECB went too early on its dovish turn.

Another talking point is that despite the positive flow in equities, we saw the USD supported, with tailwinds coming from the US Treasury market, with the US Treasury 2yr +14bp on Friday at 4.41%. We also expect US 5yr real yields +8bp at 1.54% and range lows remaining at 1.50%. If the USD strengthens, then one suspects that the goodwill towards equities will reverse.

With US real rates and the US Dollar Index rising, gold has found sellers at $1645 and is looking to revisit support at $1621, where a break would attract real attention from Pepperstone clients.

End-of-month flows can be a factor in stock movement, and we know that US corporate buyouts have increased by as much as $5 billion a day. We’ve seen an insatiable bid on Apple, and buyers made a powerful statement on Friday, showing true leadership in an industry that’s in the niche.

A boon for the central bank

We are watching and reacting to indications from the FOMC, RBA, Norges Bank and BoE this week. The Fed understandably gets our main attention as the only entity that can move all markets, and everyone wants to understand what a “cut” looks like in future rate hikes. A 75 basis point hike at this meeting is a lock, but it’s the desire to slow the future pace of hikes that could alter rate pricing and, therefore, the USD, Nasdaq and gold. . With another 59 basis points of hikes slated for the December FOMC meeting, market prices look fair and the Fed will want to give itself maximum flexibility, so it would be free to raise 50 or 75 basis points. base. This will be determined by current data and financial conditions.

The market is hungry for insight and definition from the Fed. I’m not sure we’ll get it. Thus, with a less stretched USD positioning, at the margin, this favors a USD rally. USDCNH remains a key driver here so watch for a retest of 7.3000. USDJPY bounced off 145.00 where we have seen heavy volume in recent days, which could be significant for a rally towards 149.00.

The FOMC meeting aside, it’s been a monster week of US data. So consider that we also get the JOLTS employment report, ISM manufacturing, ISM services, and non-farm payrolls. We are also preparing for the US midterm elections and as we review the potential results, this could indeed lead to broad market volatility. Needless to say, this is a blockbuster week for event risk and portfolio landmines.

For the S&P500 to move back above 4000, we will need clarity on a return to 50 basis points in December, as well as a sharp cooling in US labor markets. When it comes to US and global data, bad news is good news for risk and vice versa.

Copper and raw are worth putting on the radar. Notably, copper is consolidating with price trading in an ever-tighter range. For one, we’re watching Chinese PMIs, but the US manufacturing ISM report is expected to show 50.0 on the Diffusion Index, so it wouldn’t be too surprising if it fell below 50.0, the line between growth and contraction.

The Reserve Bank of Australia will increase by 25 basis points

The RBA is expected to rise 25bps, and while there are calls for 50bps, this appears to be a heroic call driven by last week’s higher-than-consensus CPI/PPI print. A 50 basis point hike, if it happened, would shock the markets and we would likely see big volumes in the ASX200 and Australian banks. Consumer stocks would attract an increased flow of short sales. We see the AUDUSD 1 week implied at 17.4%, which is the highest in the G10 FX, so the market is looking for movement here. AUDNZD was an interesting trade moving from 1.1450 to 1.1000. I expect that to happen and consolidate here, with price back in the May-September range.

Can the GBPJPY start?

The Bank of England is expected to raise interest rates by 75 basis points. Again, this is fully priced, so a 50 basis point hike is a low probability. However, several economists have made compelling arguments as to why we might see a lower rise. The EURGBP looks heavy on the daily, but the GBPJPY is one that has come on the radar and is an interesting tactical case study. Consider that the price has broken out and I wonder if it can really give a boost and trend. What worries the potential negative divergence (price and RSI) is that it comes up against a new fight with the Bank of Japan which could intervene once again.

It’s another big week for traders where the ability to be in front of the screens when the data drops is clearly advantageous. Position size will keep you in the game, but so will being humble and knowing when to hold and when to fold.

Summary of risks related to key events:

  • FOMC meeting (Nov 3) and Jay Powell’s Press Conference Chairman – Fed Hikes 75bps, But It All Depends on Direction
  • RBAmeeting (November 1) – 25bp hike expected, watch for option of bigger hike at December meeting
  • BoE meeting (November 3) – 75 bps expected – Comments from members Mann and Pill will also be worked out throughout the week
  • EU CPI estimate (October 31) – the market expects inflation to rise from 10% to 10.3%. We also host 16 ECB speakers throughout the week
  • US non-farm payrolls (November 4) – Consensus calls for 190,000 jobs, 3.6% unemployment rate, average hourly wage of 4.7%
  • China manufacturing and services PMI (October 31) – consensus is that the manufacturing index falls to 49.8 (from 50.1)
  • American manufacturing ISM (Nov 2) – Consensus is for this to print 50.0
  • US Services ISM (November 4) – market consensus is 55.1 (vs. 56.7)
  • US JOLTS Report – 9,625,000 expected job openings (from 10.053 million)

This article is brought to you in association with Pepperstone. All opinions expressed in this article are the author’s and do not necessarily represent the opinions of The Armchair Trader.

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