Stocks sideways as central bank uncertainty dominates

Wages hot, inflation hot, services PMI now hot...which bit of the data so far has told you the Fed is about to declare victory? The FOMC may well slow the pace of hikes down to 50bps in Dec from a series of 75bps rate increases, but that does not mean it is stopping. An unexpected acceleration in the US services sector in November saw Treasury yields rise, the dollar pare some of its recent losses and stocks fall. Gold pulled back sharply from its 200-day line at $1,795 to $1,765 as the 10yr Treasury yield swung from 3.5% to above 3.6% after the services data, though we should be careful in ascribing too much by way of cause-effect from a single data release like this…positioning was quite stretched against the dollar so Monday’s moves may reflect position/flow reversal ahead of the Fed meeting next week.  

Doubts about next week’s meeting? Perhaps, a little as markets price a 20% of 75bps, 80% for 50bps; but it’s not about the timing or pace of hikes, it’s about the destination. The terminal rate will go higher than the market or Fed is currently anticipating. When that realisation kicks in the market can flush for a final leg lower. Then you see the turn.   

The Nasdaq gave up almost two per cent on the day and you can really see a sideways trend following the Nov 10th rally. The S&P 500 was down 1.8%, the Dow fell 1.4%. European stock markets were barely changed at the open on Tuesday morning. More measures and rhetoric from Beijing to ease Covid rules should be helping risk but you might wonder if the market is already discounting this.  

Tesla fell over 6% lower as reports surfaced that it is going to slash output at its Shanghai factory. Meta says it could pull news content from Facebook in the US if Congress enacts a new law that would give publishers more power to bargain for a share of ad revenues.  

The Reserve Bank of Australia raised rates by 25bps as expected and signalled that there will be more hikes to come, though at the same time pointing more flexibility going forward. Governor Lowe said “The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course.” Not a lot in this for the Aussie, AUDUSD just ticking up a bit above its 100-day line for the time being – a level it’s been dancing around for a month now.   

EURUSD edged back from 1.06 to test 1.050 again...ECB chief economist Philip Lane playing the dovish card with remarks which reiterated how the window is closing for the central bank. He said there will be more hikes but that “a lot has been done already”. It seems a 50bps hike is nailed on for next week but it’s less clear what path the ECB believes it will take next year...inflation will remain high and its forecasts are still – as ever – wrong.   

Sterling: remarkable turnaround from the September all-time low took it past $1.23. That’s a 20% rally in two months with barely a pause for breath. Several factors are in play, from the return to fiscal discipline and façade of Treasury competence brought about by the Sunak-Hunt coup. The pound was also clearly massively oversold. And certainly, the dollar is just as important as the pound as it has retreated in lockstep with declining US Treasury yields, which saw the 10yr benchmark yield decline from a 52-week high of 4.325% to 3.5% at the start of this week. To illustrate the extent of the dollar’s decline, the euro is up around 10% against the dollar over the same period. From its Sep 26th overnight lows, the pound has risen 7.5% against the euro. The gains for sterling over the last two months make the rally in the FTSE 100 from its mid-October lows all the more impressive. As the dollar pushed back against the recent trend GBPUSD has retreated at the start of the week to below 1.22 and the 200-day line hoves into view again at 1.2135.   

Finally, the UK is finalising much tougher regulation for the crypto market....what good that will do I am not sure. Atlantic Equities cuts its price target on Coinbase to $46 per share from $67 in the wake of the FTX collapse...Genesis owes customers $900mn (FT)...fallout will continue.  

Charts – 200-day moving averages everywhere as we come into year-end signals potential regime shift from 2022’s king dollar/stocks lower narrative…or dashed hopes for the pivot gang?  

SPX – This time confirmed MACD crossover back under the 200-day line...rocky road into the Fed meeting if markets start to bet on more hikes...no Fed speakers to steer the ship.

GBP/USD – Looking for 200-day line to offer support, price action still bullish.

Gold – 200-day resistance.