Geopolitical tensions have boosted gold and crude of late, while the dollar remains in favour, as the path of least resistance continues to lead higher for equities. A quiet start to a holiday-shortened week awaits today.
Where we stand
Well, after a week or so away, it’s back to the grindstone for the final stretch of 2024. Effectively, I’d argue, the year probably ends this week, with Thanksgiving on Thursday marking the time when most start to close up their books, though we officially still have five weeks to run until the year is done.
So, what did I miss?
It appears geopolitical concerns have shot to the forefront of the agenda once more, with the Russia-Ukraine conflict at the front of traders’ minds, amid an apparent escalation in both fighting, and the ongoing war of words. The firing of western missiles inside Russia has, predictably, been met with disdain from the Kremlin, who apparently in response tweaked the nuclear doctrine, to effectively lower the threshold at which said missiles could be used.
Unsurprisingly, havens have been bid in reaction, most notably gold, with the yellow metal having advanced over 6% last week, in its best week for 18 months, in turn reclaiming $2,700/oz. Momentum appears to be back with the bulls, as it has been for so much of the year, with dips likely being viewed as buying opportunities for the time being, particularly with spot having reclaimed the 50-day moving average on Friday.
Crude has also found buyers of late, amid no sign of a resolution to ongoing tensions in the Middle East, with both Brent and WTI gaining more than 5% last week. I’d be reluctant to buy into the rally here, though, instead seeking to fade any geopolitical risk premium priced in to crude, particularly as the demand outlook remains rather dour.
Last week’s ‘flash’ PMI figures provided further evidence of this, with the eurozone manufacturing gauge printing a dismal 45.2, while the comparable US figure remained in contractionary territory at 48.8.
There remains a notable divergence in fortunes between the manufacturing and services sectors, as well as a significant transatlantic divergence to boot. S&P Global’s composite gauge of US economic output rose to a 31-month high per the preliminary November reading, while the equivalent eurozone print slipped to a 10-month low 48.1, and the UK figure fell to 49.9, a 13-month low.
Against this backdrop, which helps to reinforce the ‘US exceptionalism’ theme, it’s no surprise to find the USD continuing to perform well against most peers. The DXY briefly rose to the 108 figure for the first time in a couple of years on Friday, before paring intraday gains. That said, I find it tough to bet against the buck at this moment in time, as US growth continues to vastly outpace that of peers, and as risks around the FOMC outlook become much more two-sided into early-2025.
EUR under selling pressure
Other G10s remain unattractive, with the EUR the ‘sick man’ of the G10 FX world of late, dipping as low as 1.0335 on Friday, its weakest in over two years. Some of this selling pressure could, though, be a little overdone, particularly with the ECB apparently loath to deliver a ‘jumbo’ 50bp cut next month, despite money markets pricing around a 50/50 chance of such action. Friday’s ‘flash’ CPI figures will probably put that idea to bed, with core inflation seen accelerating to 2.8% YoY. A short-term EUR relief rally could, hence, be on the cards, though I’d be a seller into the 1.05 figure, if we get there.
Here in the UK, while the BoE remain a hawkish outlier among G10 central banks, likely continuing with a “gradual” pace of easing, and not delivering another Bank Rate cut until next February, this hawkishness is for the ‘wrong’ reasons. The BoE remain more reluctant to normalise policy than peers primarily due to the stubborn nature of price pressures within the UK economy, with services inflation still running at 5% YoY.
This comes just as the economy loses momentum, with GDP having risen by a dismal 0.1% QoQ in the three months to September, and with retail sales having fallen a chunky 0.7% MoM last month. There seems little by way of festive cheer on the horizon for GBP assets, with rallies in the quid there to be sold.
There is, however, likely to be some festive cheer on the cards for equity participants, with the path of least resistance continuing to lead to the upside amid strong economic and earnings growth, and as – for now – the global policy put continues to provide support. Seasonal trends also support this view, likely a result of the typical year-end portfolio ‘window dressing’. Over the last 30 years, from now until year-end, the S&P has on average notched a gain of 1.9%, while the index has notched a monthly December gain in four of the last five years. It remains tough to bet against the bull market for now.
Looking ahead
A quiet-ish calendar awaits to kick-off what could well prove to be a quiet-ish week, particularly with US participants away on Thursday, and most being away on Friday too.
On the data front, the latest German sentiment surveys from the IFO institute stand as the calendar highlight. The headline business climate gauge is set to drop to 86.0, from a prior 86.5, continuing the recent run of dismal data from Europe’s stalling economic engine.
Stateside, regional manufacturing figures are due from the Dallas Fed, along with national activity data from the Chicago Fed, though neither are likely to be particularly market-moving.
Speaking of central banks, a handful of speakers are due, including ECB Chief Economist Lane, and BoE Deputy Governor Lombardelli, with the former likely to cast further doubt on the idea of a 50bp cut next month.
Good luck to all.
