Financial markets were feeling the hangover from the November rally

US yields rebounded and major indices sold off yesterday as markets have priced in a beyond-reasonable amount of rate cuts from the Federal Reserve (Fed) for next year based on a soft-landing scenario. All eyes are on the US jobs data for some comfort… that may or may not come.  

Hangover

Financial markets were feeling the hangover from the November rally yesterday. The week kicked off with a downside correction in many stock and bond markets, whereas the bigger than expected slump in US factory orders, soft growth in British retail sales amid the Black Friday discounts failed to boost sales, and an unexpected fall in Australian company profits last quarter could’ve further boosted the central bank doves and the rate cut bets around the globe. But they didn’t’. The US 2-year yield jumped to 4.66% level as the 10-year yield rebounded to 4.30% on awakening that the Fed rate cut bets may have gone a bit too far, and that it was – maybe time for a correction. As such, the S&P500 gave back some field close to a ytd high level and we saw a bigger selloff in rate-sensitive Nasdaq – which lost 1% yesterday. Stocks in Europe retreated as well, but they first advanced to a fresh high since summer before Americans came to hammer sentiment.  

In the FX, the US dollar jumped past its 200-DMA, and in metals, the ounce of gold saw a more than $100 selloff after hitting an ATH on Monday’s open. The kneejerk reaction of the market to yesterday’s gold rally was so violent that it made me think twice about the potential of a significant rise in gold prices in the short run above the $2000 level. Gold’s value is negatively correlated to the US yields as gold doesn’t pay interest. Therefore, if the US yields continue to fall, there will be a natural appetite for holding gold. But if yields go up – which is my base case scenario after such a rapid and significant fall in November, then the cost of holding the non-interest-bearing gold will increase, and its value should decrease.  

Data watch

Investors don’t have much time to think of the past and make digestive trades. We will have a flow of new and important economic data – including the US jobs data - which will help the market find fresh direction. Either soft data will cement the Fed rate cut bets or robust data will inject uncertainty and volatility to the market. In this context, the JOLTS data is expected to show lesser job additions in the US in October. But note that the US jobs market was impacted by strikes last month, last month’s negative impact could turn out to be positive for this month, and the latter could eventually blur the visibility of the health of the US jobs market.  

Presently, the markets price in around 125bp cut from the Fed next year, that’s obviously significantly lower than where the Fed sees its rate by the end of next year. The Fed optimism looks overstretched, the risk assets were in the overbought territory until yesterday, and we need sufficiently soft US data to keep the bears asleep, otherwise a gust of hot wind could easily rouse the bear from its slumber. 

Elsewhere  

The Reserve Bank of Australia (RBA) kept its policy rate unchanged at today’s meeting and warned that more tightening could be needed depending on the data. Governor Michelle Bullock says that Australian inflation becomes more ‘home-grown’ than supply chain related, and if inflation remains sticky, more rate hikes could be in the pipeline for Australians. Yes, but we already knew that the RBA would sound reasonably hawkish, so the AUDUSD couldn’t benefit from the RBA’s hawkish accompanying statement, the pair fell on a broad-based rebound in the US dollar, instead.  The USDJPY remained offered at the 100-DMA despite a softer than expected inflation read in Tokyo and a disappointing sales of the 10-year JGBs. The EURUSD on the other hand tipped a toe below its 200-DMA and tested the 1.08 support to the downside yesterday. The easing Eurozone inflation, along with slowing European economies boost the dovish European Central Bank (ECB) expectations. Today, Eurozone’s October PPI and final services PMI data should print a further decline in producer price inflation and a continued contraction in activity in the zone, as the Eurozone GDP read – due Thursday – will likely confirm a 0.1% contraction last quarter. The EURUSD sees support near 1.0800/1.0820, which includes the 200-DMA and the major 38.2% Fibonacci retracement on October – November rebound. But clearing this support – which shouldn’t be a big deal if the US dollar further corrects - should pave the way for an extended selloff toward 1.0730.

Whatever

The selloff in crude oil continues. The barrel of US crude just slipped below the $73pb level this morning, as oil bears totally ignored the Saudi Energy Minister Abdulaziz bin Salman’s warning that production cuts can ‘absolutely’ continue past Q1 if needed. At this point, OPEC had better wait for the dust to settle. Not seeing reaction to threats is worse than watching prices go down. Prospects of slower global economy will likely help the oil bears hit their $70pb target in the continuation of a solidly building negative trend.