Despite US CPI inflation moving higher, a move lower on bond yields and a USD correction has allowed risk appetite to improve. With indices testing key inflexion points, this could be a crucial moment for the near to medium-term outlook.
- Main drivers: Marginal risk positive bias; Fed minutes discuss taper timeline; US PPI and jobless claims data due
- Mixed sentiment: A sharp turn lower on bond yields has hit the USD for some profit-taking on the recent gains. This has also helped to steady equity markets to an extent.
- Big banks to turn to focus on earnings season: Bank of America, Wells Fargo, Morgan Stanley and Citigroup all report earnings today. [Could drive risk later]
- FOMC meeting minutes: Fed minutes laid out the potential to start reducing asset purchases in mid-November or mid-December. The reduction in the $120bn total assets purchases per month would be at a rate of -$10bn Treasuries and -$5bn mortgage-backed securities per month. [Broadly in line with expectations]
- Fed speakers: FOMC’s Bowman (permanent voter, centrist) gave an interesting insight into where the committee balance may sit. She is “very comfortable” with a November taper, citing concerns over inflation.
- Central bank speakers due today: Another raft of speakers today. FOMC’s Bullard (2022 voter, hawk) at 1235GMT; Bostic (2021 voter, hawk) speaks at 1300GMT; FOMC’s Barkin (2021 voter, hawk) speaks at 1615GMT; with FOMC’s Daly (2021 voter, mild dove) and Williams (permanent voter, mild dove) both speaking at 1700GMT.
- Data watch: US PPI at 1230GMT is expected to show factory-gate inflation still increasing. Core PPI is expected to increase to 7.1% (from 6.7% in August). Weekly Jobless Claims at 1230GMT expected to improve slightly to 315,000 (from 326,000 last week)
- Broad outlook: Marginally risk positive with equities building support, USD retracing, precious metals rebounding.
- Forex: US Dollar Index hit one-year highs yesterday but has unwound slightly early today. EUR/USD has started to engage in a near term recovery. A move through resistance is at 1.1585/1.1600 now leaves this as initial support. Above 1.1640 opens 1.1665/1.1700 key resistance. We still prefer selling into strength but see near term recovery potential first. GBP/USD recovery through 1.3650 opens 1.3730/1.3800. We see near term recovery potential but still see rallies as a chance for medium-term short positions. AUD/USD near term recovery continuing, with the base pattern implied target of 0.7460. Initial resistance around 0.7410/0.7475.
- Commodities: Gold rallying above $1790 is encouraging but needs to hold the move. This is a crucial moment for the rally. Resistance at $1810 needs to be broken to continue. Silver rebound is testing the top of the resistance band $22.75/$23.18 and the downtrend. A crucial inflexion point for the outlook at the four-month downtrend. Brent Crude oil is still trading with a positive bias despite a minor consolidation still in place. Momentum is still stretched and a potential “bearish divergence” means we are cautious.
- Indices: A near term technical rally on indices but needs to continue. S&P 500 futures have rebounded into resistance around 4365/4388 and the 6-week downtrend. RSI momentum at a key inflexion point. DAX has rallied through 15,265 imply recovery potential towards 15,700. Next resistance 15,470. How the market reacts to this recovery will be very telling as to the overall outlook. We remain cautious. FTSE 100 has rallied to test 7197 but rallies have continually failed to sustain traction previously, so we are cautious up here.