Market
Even though the soft US CPI challenged the biggest conviction trades, markets are in a regime where more evidence is needed to push forward central themes.
The soft October CPI print fueled Fed-pivot optimism, but Fed speakers pushed back last week by still seeing a higher terminal rate. China easing covid restrictions saw everything with even a whiff of China exposure trend higher. Still, the market wants to see China remove all zero-covid policies and provide more growth support.
Amid this flux, the market will likely run contrarian until the data confirms a new trend. So, when narratives lean too far to one side of the story, risk-reward tilts toward the other; contrarian plays will kick in.
Data is very mixed, with consumer spending more resilient than expected. However, rates-sensitive sectors, such as housing, are slowing sharply, as underscored by last week's NAHB homebuilder survey.
Another tug-of-war in STIR markets ensued as a robust UK CPI print and hawkish pushback from Fed and ECB speakers derailed the pivot train reminding everyone of the perils of chasing stocks higher on speculative rate adjustments.
However, with fast money, who would typically seize the hawkish moment pretty much sidelined, for now, it is easier for pivot mania to push back against Fed guidance; hence stocks remain supported by the fear of missing out.
Oil
Crude oil prices collapsed further during Friday's New York session before recovering into the NYMEX close as the correlation disconnect kicked in. The recent extreme downside in oil is quite head-scratching for many who were seriously wrong-footed, given that China has removed some of the covid-19 restrictions, which should drive up demand. However, the keen driver of the prompt downside momentum is the growing unease that China will not loosen covid lockdown policies because infections are rising again.
And while correlation traders/algos may have thought the move was too large and went too far compared to other China-sensitive assets, price action suggests portfolio investors have abruptly reversed course dumping the China reopening plays in favour of the consensus coalescing around a likely recession next year. Oil prices will bear a significant brunt if such a regime shift plays out.
If you position the dollar wrong, you probably get everything wrong, so the multi-million dollar question on investors' minds is, where does the dollar go from here?
Having ridden the 'Fed pivot' and 'China reopening' themes over the past few weeks, the FX market appears to be consolidating. Fed speakers continued the pushback of the pivot gang by signalling a higher terminal rate. However, the diverging stories told by strong retail sales and weak manufacturing surveys have left markets scratching their heads on where the USD goes next as liquidity worsens going into Thanksgiving week.
While it is tempting to run big short on dollar books for the eventual Fed and China " pivots." It is also equally as compelling to extrapolate dollar strength after years of bears being disappointed. So you can be patient for the next big dollar move and trade dollar-neutral positions until the pivot lights at the end of the tunnel are flickering a bit brighter. Clearer signposts will allow FX markets to get ahead of any China reopening or actual Fed pivot.
SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.
Our publications are for general information purposes only. It is not investment advice or a solicitation to buy or sell securities.
Opinions are the authors — not necessarily SPI Asset Management its officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.
Recommended Content
Editors’ Picks
EUR/USD holds steady above 1.0800, looks to post weekly losses
EUR/USD trades marginally higher on the day above 1.0800 after the data from the US showed that Durable Goods Orders declined by 0.8% in September. Nevertheless, the pair remains on track to close the fourth consecutive week in negative territory.
GBP/USD extends recovery to 1.3000 area
GBP/USD extends its recovery and trades at around 1.3000 in the American session on Friday. The US Dollar struggles to gather strength as the market mood remains positive heading into the weekend, allowing the pair to hold its ground.
Gold fluctuates in narrow range below $2,750
Gold stays in a consolidation phase and fluctuates in a relatively tight range below $2,750 on Friday. US Treasury bond yields stabilize in the American session, making it difficult for XAU/USD to gather directional momentum.
Crypto Today: XRP, Bitcoin and Ethereum decline as Ripple files response to SEC appeal
XRP loses over 1.30% as Ripple's executive confirms the filing of an important document in the appeals process in the SEC lawsuit. Bitcoin corrects less than 1% and sustains above $67,500. Ethereum is down nearly 0.20%, holding above the key support level of $2,500.
US elections: The race to the White House tightens
Trump closes in on Harris’s lead in the polls. Neck and neck race spurs market jitters. Outcome still hinges on battleground states.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.