Wall Street slips Into a Quasi-Hibernation for the Thanksgiving stretch

Markets

As US traders headed into what amounts to their annual 4-day Thanksgiving holiday event on Wall Street, focus sharpened on inflation and month-end portfolio rebalancing. Stocks dropped amid sticky inflation, yet bond yields and the dollar softened counterintuitively—even amid concerns over looming Trump tariffs. The inconsistency in October's data has left traders cautious, opting not to read too deeply into Wednesday’s core inflation print. Instead, they are awaiting the November payroll and CPI releases. They are critical indicators that traders ( and the Fed) will consider before making pivotal decisions ahead of the December 18 meeting, such as whether to price in a rate cut or a pause.

The November FOMC minutes indicate that the Committee will likely pause rate cuts as soon as next month or, more plausibly, at the first meeting of 2025.

As Wall Street literally and figuratively slipped into a quasi-hibernation for the Thanksgiving stretch, the trading floors quieted down right around the noon bell in New York. This slowdown presented an opportune moment for traders to lock in profits, trimming their positions as the month wrapped up. However, despite the earlier shockwaves sent through the markets by Trump's tariff bombshell, the S&P 500 stood unyielding. Bolstered by expectations tied to Trump’s aggressive tax cuts and broad deregulation initiatives, the index showcased its robustness, refusing to capitulate to the week's earlier drama.

But what might lure the markets back for more next week? A sense of relief has permeated this week, thanks to a soothing effect in the Treasury market. Yields have pulled back even amid substantial debt offerings; a reaction sparked not just by the calming influence of Scott Bessent's nomination as Treasury Secretary but also by declining oil prices post the Israel-Hezbollah ceasefire. Bessent's strategic economic blueprint, known as the 'three 3’s' plan, focuses on slashing deficits and ramping up oil production. These measures are poised to exert a deflationary impact on both the supply and demand sides of the economy, potentially reshaping market dynamics in the years ahead.

With the U.S. dollar set to assert its dominance when President Trump gears up to implement tariffs potentially on his first day back in office, its strength could considerably soften the blow of tariff-induced inflation. Traders have positioned themselves with reasonable levels of tariff plunge protection, particularly in Asian and European markets. Yet, the market atmosphere isn't full-blown panic; instead, traders are hedging cautiously and selectively, aware that Trump's tariff threats might end up being more bark than bite. However, as the old saying goes, "where there's smoke, there's fire." With this in mind, the market remains on high alert, diligently monitoring Trump's Truth Social for any new indications of tariff developments.

Forex markets

The so-called "Bessent Bounce" has cooled off the US dollar rally, prompting bond vigilantes to back off as the market grips with Scott Bessent's 3-3-3 economic strategy, mainly its focus on deficit reduction.

Concurrently, month-end dollar sales have started to kick in, aligning with the WMR (WM Reuters Company/World Market Rate FIX ). Here’s how the month-end rebalancing typically works: If US equities are up more than 2.5% in a month—for example, the S&P 500 is up 5.6%, the Nasdaq 100 up 5.2%, and the Russell 2000 up a whopping 11.2%—foreign investors who hedge their equity exposure by selling dollar need to adjust their hedges. If you’re holding a billion dollars in the S&P 500 and the equivalent short US dollar hedge, your billion in the SPX basket is suddenly worth $1.056 billion, necessitating the sale of $56 million to rebalance your hedge.

This type of adjustment cascades across thousands of large and small global portfolios, painting a broader picture of systematic rebalancing. Most portfolio managers execute these hedges at the WMR fix at the end of the month. However, we're also seeing some year-end corporate US dollar selling starting to layer into the markets. My experience managing billions in daily FX flows suggests that this period(Thanksgiving through Christmas) can be tricky unless you’ve correctly read the market’s direction and positioned accordingly for month and year-end, which is no easy task. Ultimately, it's about mitigating transactional losses more than boosting the profit-and-loss account. Yet, with President Trump’s penchant for tariff shocks, staying on top of these moves is crucial—no one wants to be caught off-guard by the next tariff bombshell that reverberates around the globe.

Oil markets

Oil prices have been hovering within a confined range, caught in the perpetual tug-of-war between geopolitical shifts and classic supply-and-demand dynamics. Currently trading at the lower end of recent boundaries, prices are somewhat subdued due to eased tensions in the Middle East, yet they remain buoyed by uncertainties in Eastern Europe.

The supply landscape has been significantly influenced by OPEC+'s strategic decision to postpone a scheduled production increase—a move that has aligned with rising non-OPEC+ outputs from powerhouses like the United States, Canada, Guyana, and Argentina. These countries are collectively set to satisfy the anticipated global demand growth over the next year, as per the International Energy Agency (IEA).

On the flip side, the demand equation offers a contrasting narrative. China's oil consumption has been on a downward trajectory for six consecutive months, placing downward pressure on global oil prices. This decline, however, is partially mitigated by burgeoning demand in advanced economies, marking a stark divergence in global oil consumption trends. Such a juxtaposition highlights the intricate interplay of factors steering the oil markets today, leading to a somewhat stagnant range-trade scenario as these opposing forces continue to play out.