Week ahead: market insights for the 15th of November
Inflation took all of the headlines last week when the US CPI printed a 30 year high of 6.2%!
In the aftermath, US bond yields rose sharply and there were solid gains for USD and Gold too.
US indices closed lower on the day, although there was no sign of panic, and the indices recovered in thin holiday trading on Thursday.
Market faith in ‘transitory’ inflation looks to be holding up so far...
Key events for the week ahead:
UK: Employment data Tuesday, Inflation Data on Wednesday & Retail Sales on Friday
US: Retail Sales on Tuesday
Australia: RBA Minutes/Speech from Governor Lowe on Tuesday followed by Q3 wage data on Wednesday
Canada: Inflation Data On Wednesday
Will indices pause for breath and consolidate at these levels?
In FX, King Dollar has reigned supreme. Will it continue?
Finally something for the goldbugs to get excited about..
After printing the low at $1759 on the 3rd of November, gold set off on a relentless rally.
Breaking out from the cluster of 20 & 50 Day moving averages and the two daily resistance levels with momentum and looking strong.
It’s been a strange period for gold. I like to use US 10Y real yields as one proxy for what gold ‘should’ do.
Real yields are shorthand for ‘inflation adjusted yields’. I.e. the REAL return after inflation is accounted for.
No need to get too technical on exactly how they’re calculated. The US treasury publishes that information daily here.
Why do real yields matter for gold?
It’s a pretty simple theory.
Gold is a zero yielding asset.
If inflation adjusted (real) yields are negative, then zero is much better than negative…
(Just like all correlations, it’s not perfect and can decouple)
However, since the Fed doubled down on transitory inflation at the November 3rd meeting, real yields have dipped further into the red: from -0.93% to -1.17% & Gold has rallied over $100 even as the dollar has remained strong against other currencies...
Let me grab those rocket emojis. Can it continue?
We’ll be keeping a close eye on the bond market. If US bond yields continue to rise from here then Gold could lose some of last week's shine.
After running into the 200 Day moving average and resistance in the 0.7750 area, upside for the Aussie was capped, and USD strength took over.
There’s a lot of noise around the AUD fundamentals right now too. First up, Australia’s largest export: Iron Ore.
Iron ore rallied from March 2020 right the way through to May 2021.
After a month or two at elevated levels, the price dropped sharply and has now retraced almost the entirety of the move higher.
It’s been the same for a lot of commodities this year, but prospects for a near-term rally are weak. China is the largest buyer of Australia’s Iron Ore, and their ‘Blue Sky’ policy ahead of the Winter Olympics early in 2022 is likely to see continued curbs on steel production.Nobody wants to see a ski-jumper in smog...
Once the Olympics are over, there are no guarantees that production will ramp back up either.
One of the key drivers of iron ore demand has been the rampant Chinese property market and infrastructure spending.
Now, Evergrande might not be China’s Lehman Moment, but it’s hard to argue that construction will continue at the same pace when the CCP are frantically trying to manage developer defaults…
On the monetary policy front, the RBA insists that 2024 is still the most likely year for rate hikes, although there has been a slight softening in their stance lately.
The minutes of their last meeting will be released on Tuesday at 12.30AM GMT, followed by comments from Governor Lowe two hours later.
These events are not expected to yield much in the way of new information.
Governor Lowe may even comment on October's surprise fall in employment as lockdowns continued to have an impact.
The RBA has been very clear that wages are the key metric.
‘For inflation to be between 2 and 3 per cent on a sustainable basis, the labour market will need to be tighter and wages growth materially higher than they are at present. The Board will not raise the cash rate until these criteria are met, and is prepared to be patient’
Basically, sluggish wage growth makes it hard for inflation to take root, so the central bank feels low rates should be maintained until this changes.
Wage growth of 3% and underlying inflation in the middle of the 2 to 3% target band is the implied benchmark.
The Wage Price Index will be published on Wednesday at 12:30AM GMT
Previous readings of 0.4% QoQ and 1.7% YoY set the bar.
Although the data is backward-looking and will be impacted by lockdowns, it would be no surprise to see a reaction in the AUD & Aussie bond markets if a significant deviation is printed either way and rate hike probabilities are repriced.
Wage growth will be a key metric to monitor going forward.
Bitcoin: To Infinity & Beyond!
Buzz Lightyear or BuzzKill…?
After hitting all time highs last week there was no bullish follow through for the crypto OG…
Apple’s Tim Cook confirmed that he owned some crypto but had no plans to put crypto on the tech giant’s books…
Still, there’s no doubting the bullish trend with price trading above the 20, 100 & 200 day moving averages and just shy of all-time-highs:
What could spoil the party?
The old economy might strike back.
President Biden is expected to sign the infrastructure bill on Monday.
The bill includes a set of somewhat clumsy regulations for the crypto industry (have to start somewhere).
This is not new information, and there’s bipartisan support for amendments to clarify the language used in the bill, which may come later.
In the meantime, we’ll be keeping an eye out for any policymakers getting carried away with their newfound regulatory power and ramping up any crypto rhetoric.
On that point, there’s a hearing titled “Demystifying Crypto: Digital Assets and the Role of Government," scheduled for Thursday November 17th at 2:30 p.m. EST.
One final point to keep an eye on.
Covid cases in Europe are increasing. Last week there was speculation that the Netherlands would impose a short semi-lockdown, Germany’s finance minister Scholz called for additional COVID measures to get through winter, and Austria’s chancellor warned of lockdowns for unvaccinated people.
Markets were unphased.
It may just be political pressure to nudge people to get vaccinated. However, any serious consideration of widespread restrictions across Europe this winter would almost certainly have a negative impact on risk sentiment.
Something to keep on the radar.
Not investment advice. Past performance does not guarantee or predict future performance.