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Technical analysis: trading opportunities in an evolving world

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Investors continue to debate whether long-end bonds are a good buy as we roll into 2023, given the consensus view of a recession in Europe, the UK, and the US, while China should see a tough 1H23 but a more prosperous 2H23.

We debate whether the USD has indeed peaked and whether the seasonal rally in risky assets into the end of the year is on the money this time around. Some macro thematic views to consider but many still feel early to put on in any great size.

Looking at the data flow for this week it doesn’t feel like any of those debates/views will be accelerated. One aspect which may have kept a lid on any buying of risk last week was Friday’s options expiry, with over $2t of index options notional expiring. Having passed, in theory, it means the S&P500 is free to move around more readily. An equity melt-up into year-end is still possible, but a downside break of the 100-day MA at 3917 may alter that view. The 200-day MA on the top side (4068) posed as resistance on 21 April and 16 Aug and may do this time should it be tested. However, the bulls may take this one to the bank. We shall see.

The USD remains central to markets, but with the fed funds terminal rate back above 5% (thanks largely to James Bullard) and US 5YR real rates back to 1.69%, the USD looks supported. Pepperstone clients see this and are holding a net long exposure here.

On a central bank theme, one of the most interesting dynamics last week was Japan’s October inflation rate pushed to 3.7%, equalling the highest level since 2014 and not far off levels last seen in the 1990’s. Welcome to the inflation club Japan! Tokyo CPI comes out on Friday and that data is for November and therefore is more recent. An upside surprise (consensus is 3.6% from 3.5%) could get people looking at future Bank of Japan policy in earnest. With BoJ chief Kuroda leaving the bank next year, we question policy without the keynote dove at the helm.


Looking at the event risks ahead

It’s a quiet week ahead by way of known event risks, with many traders taking leave over the Thanksgiving celebrations (Thursday). On the docket we see the FOMC minutes, RBA governor Lowe speaks (Tuesday). There is some spluttering of colour from Fed and ECB speakers, an RBNZ meeting (they should hike by 50bp), as well as central bank meeting in Sweden and South Africa. Tokyo inflation (Friday) will be interesting for the reasons expressed above. To many, it has been an underwhelming build up, but we have a football World Cup ahead of us and a chance to revisit the notion that once again “It’s Coming Home”.

With a quiet week in mind, it also offers a chance to look at the big catalysts left on the calendar that could drive into year-end. I’ve looked solely at the marquee event risks, that matter above all else. These dates need to go in the diary. Arguably all roads lead to a 24-hour window in mid-December, where the ECB, BoE and Fed meet and are expected to hike interest rates by 50bp a piece. Their guidance and economic projections could set the tone into New Year and into 2023.

  • 30 Nov – EU CPI inflation – this print could decide if we see a 50bp or 75bp hike in the December ECB meeting. The current headline CPI estimate sits at 10.7%, so one questions if we see the estimate move north of 11%.
  • 3 Dec – US non-farm payrolls – we know US payrolls always pose a risk for traders. The Fed want to see a cooling of the labour market, but while we did see a lift in the last unemployment rate report at the last report, the US labour market is still in good health. A US payrolls print below 150k could be taken well by markets, but it’s the unemployment rate (which is taken off the Household Survey) that really drives, so a rise from 3.7% could see risky markets (like equity) rally.
  • 6 Dec – RBA meeting – we should get another 25bp hike, but will we get clearer signs of one more hike in this cycle and then an extended pause? Recall, the RBA doesn’t meet in January, so they’ll refrain from being too explicit and committal here and retain a degree of flexibility.
  • 12 Dec – UK CPI inflation – with UK headline inflation at 11.1%, another rise in price pressures could put the BoE in a real pickle. Ever-rising inflation and deteriorating growth are not a great mix for UK assets.
  • 14 Dec – US Nov CPI inflation – after last month’s downside surprise (core CPI came in at 6.3%), sending equity sharply higher and slamming the USD, this CPI print could be huge for markets. One could argue it’s the key data point for the rest of 2022. Should we get another downside surprise and risky asset rally hard into year-end.
  • 15 Dec – FOMC meeting and Chair Powell presser– the outcome of the Nov US CPI print could influence what we hear from the Fed, but moderation in the pace of hikes to 50bp hike seems very likely. Given James Bullard’s comments last week for a terminal rate between 5-7%, we continue to view 5% as the minimum level the Fed is targeting for the fed funds rate, but they’d ideally like to get to a point where the fed funds rate is higher than the inflation rate. This could be a pivotal meeting, especially given we get new economic and fed funds projections at this meeting and the Fed has made it clear they plan to send a message out, portraying that rates are going higher and will stay high. The market prices the fed funds rate to peak at 5.07% by June.
  • 15 Dec – BoE meeting– a hard one for the BoE and a clear balancing act. The BoE were dovish at the last meeting, but with very high inflation, and with UK households very sensitive to rate hikes and amid a bleak economic outlook, the BoE are between a rock and a hard place. We should get a 50bp hike here though.
  • 16 Dec – ECB meeting– the market prices 59bp of hikes here, but while we watch for the ECB to get the deposit rate to neutral there is a focus on how the ECB start to unwind its many asset purchase programs.

This article is brought to you in association with Pepperstone. All opinions expressed in this article are from the author and do not necessarily represent the opinions of The Armchair Trader.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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