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Market Insights

Week ahead: market insights for the 20th of December

Marcodesiac Week Ahead.webp

What an eventful week that was!

Central banks are starting to turn away from transitory & towards tightening. Let’s recap this week’s meetings with the key points:

  • US Federal Reserve: Doubling Taper Speed, expect to hike rates three times next year
  • Bank Of England: Surprise 15bps hike to 0.25%
  • Norges Bank: Hiked to 0.5% as expected, signals another 25bps hike likely in March
  • ECB: Ending PEPP in March, will increase APP to transition from one QE to another
  • Bank of Japan: Pandemic purchase of corporate bonds ends in March, Corporate funding September
  • Swiss National Bank: On hold. Franc remains highly valued.

Some common threads running through the events. For the Federal Reserve and Bank of England, it was all about inflation concerns with some signs that expectations for higher inflation (and higher wages) could become entrenched if they chose not to act.

Norges Bank: Norway’s economy has been ticking along nicely, so the governor’s comment that “When most in the economy is normal, rates should also approach normality” indicates a clear path to further hikes.

The ECB managed to do what the ECB always does, and offer something for everyone. The decision to increase the APP program in March to smooth the transition away from PEPP was well-received alongside assurances that the central bank will continue to purchase bonds from peripheral economies such as Greece.

The Bank of Japan will also dial back their corporate bond & commercial paper purchases by March, although they have chosen to extend the corporate funding facility until September.

The SNB maintains that the Franc is highly valued. Keep an eye out for the weekly ‘sight deposit’ data to see if they back words up with action (FX intervention).

Plenty of divergence between central banks there. Whilst potential risks from the omicron variant were noted, they didn’t seem to influence policymakers decisions.

Looking ahead to next week:

  • Monday: China loan prime rate (potential rate cut)
  • Tuesday: RBA Minutes, Germany & EZ consumer confidence
  • Wednesday: UK & US Q3 GDP, Chicago Fed, US consumer confidence
  • Thursday: UK consumer confidence, US durable goods, personal income/spending, PCE prices & Michigan consumer sentiment survey
  • Friday: Christmas Eve

We’ll also have speeches from a wide assortment of central bankers to update us on the thoughts surrounding the latest policy decisions.

Right, let’s look at some charts!

COMMODITIES
Oil be the judge of that:

Great pun, eh?

hBd3TPeL.png

Oil is usually an excellent ‘judge’ or barometer of overall sentiment about the economy and it sums up where we are right now.

Omicron fears initially led to a massive unwinding of long positions with Brent falling from over $80 to $65.63 in a matter of days. Since then we’ve seen price retrace to the midpoint of the broader range ($85.80: $65.63). Yet the continued uncertainty has capped the recovery.

Weighing on price currently:

  1. Softer demand from Asia
  2. International Energy Agency report that the oil market has returned to surplus
  3. Omicron restrictions impacting overall travel
  4. Tightening Monetary Policy

Demand has remained strong however with US inventories declining in this past week. Lots of conflicting signals for the market to digest. It would be no surprise if speculative traders take a break over the Christmas period to reassess the outlook for the upcoming year, leaving us rangebound in the near-term until the outlook is clearer.

INDICES
Hong Kong 50: Relief or REKT?

“NEVER CATCH A FALLING KNIFE” is one of those timeless trading clichés. Usually if a cliché sticks around it’s because there’s truth to it. Yet, there’s always that temptation to be a hero and do it anyway.

The Honk Kong Index is a perfect example!

QLKyXvCu.png

What makes it even harder to resist is that sometimes traders can be rewarded for ignoring the sage advice of seasoned professionals who got their fingers burnt and learnt their lessons.

One trading legend I always come back to is Ed Seykota and his five rules:

  1. Cut losses.
  2. Ride winners.
  3. Keep bets small.
  4. Follow the rules without question.
  5. Know when to break the rules.

What might be a good reason to break the falling knife rule?

Well, after markets closed on Friday, the CBIRC (China's banking and securities regulator) eased restrictions on insurance institutions which clears the path for them to directly invest in the stock market.

The Honk Kong 50 has been in a clear downtrend since the middle of February. Some of China’s largest firms are heavyweights in the index and have come under regulatory scrutiny throughout 2021. Is this announcement a sign that the tide is turning? Definitely a market to keep a keen eye on.

FOREX
Aussie Yen: All I want for Christmas is a Santa rally

AUDJPY is a useful FX proxy for risk sentiment. We’ve seen stock indices bounce around through the past week heading into quadruple witching option expiries on Friday so there really haven’t been clear signals there.

Oil can’t decide about omicron, and so we look to this key FX pair.

kloXIFC5.png

And it’s not much clearer! It actually looks very similar to the oil chart. A strong selloff from the highs was matched by a swift recovery from the lows and we’re currently sitting around the middle of that range.

Next week is pretty light on the data calendar, and the definition of the traditional ‘Santa rally’ is often stretched by traders to include the run up to Christmas too.

If US indices do stage a rally into year end, AUDJPY could accompany them on the journey.

More certainty around the omicron variant would certainly help on this front. The impact of each virus wave seems to be less severe, and that’s the base case for all of the central banks who announced policy this week.

It also fits the pattern of the Spanish Flu of 1918. After the first two waves, the virus lost its mojo, became less virulent and evolved to become the flu that we still live with today. Some virologists speculate that’s similar to what we’re seeing now with omicron. Others contend that it’s too soon to tell or worse… The UK’s chief medical officer Chris Whitty says that we’ll need to live with restrictions for years.

Markets will be hoping he’s wrong, and I’m sure everyone else will be too!

Not investment advice. Past performance does not guarantee or predict future performance.

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