Week ahead: market insights for the 29th of November
Let’s get one thing clear…
The dollar over the past week or so has just been completely relentless.
Will it continue? Who knows?
But I think this is an important chart to show where exactly this has come from is the cross currency basis swap between 3 month EURIBOR and 3m USD LIBOR.
Hang onto this because we’ll explain to you what this is and why it’s important next week…
The new Covid variant is set to dominate headlines in the week ahead. Global stock markets got a severe case of the jitters on Friday amid speculation that the ‘Nu’ variant could be more contagious and vaccine resistant.
The key data points for the next five days are a mixed bag of inflation, PMIs and a key testimony from Powell and Yellen on Tuesday.
- Chinese PMIs
- Powell & Yellen’s testimony to the Senate
- Caixin PMIs, US ISM Manufacturing PMIs
- US Jobless Claims
- US NFPs and Turkish Inflation data
Chinese PMIs have been weak throughout 2021, owing to pandemic effects plus the uncertainty that the Chinese Communist Party has placed on the economy through their crackdowns on many different sectors & relative credit tightening (they don’t want firms and consumers to be taking out as many loans, in effect.
Because of this, I wanted to see if there was a relationship between the data and JPY/AUD.
There certainly seems to be - see PMIs are what’s known as a diffusion index.
That means a number above 50 is ‘good’ and a number below 50 is ‘bad’.
A simple view here might be that Australia exports things that people need (commodities) while Japan exports things that people want (cars and manufactured goods).
Since Japan has a lot of their production in China, it would make sense to think that a weaker manufacturing environment in China would have negative effects on the yen, relative to the Aussie Dollar in the short term.
Could look for a turnaround in Chinese data, however, since it is at the lower limit of its longer term trend.
That said, if new Covid variant headlines continue to dominate, AUDJPY (inverse of JPYAUD shown above) is an excellent barometer for overall risk sentiment.
On Friday morning, risk off dominated and we saw the pair break key support having failed to reclaim above the 200 day moving average throughout the week.
Tuesday brings Jerome Powell and Janet Yellen together to testify in front of the Senate.
This could shine some light on the speed at which Powell (and Yellen) reckon the Fed should taper their asset purchases, especially considering other Fed members’ comments recently.
Mary Daly: "If things continue to do what they've been doing, then I would completely support an accelerated pace of tapering."
Christopher Waller: "The rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022."
Richard Clarida: “I’ll be looking closely at the data that we get between now and the December meeting.”
James Bullard: “I think it behooves the committee to go in a more hawkish direction in the next couple of meetings so we are managing the risk of inflation appropriately.”
Inflation and the price of oil are pretty tightly linked.
As prices of inputs cost more, the price of oil will also have to increase.
There is a link between interest rates and oil based off of this then.
What’s very interesting about the relationship between oil and interest rates is that it tends to rise with a positive business cycle.
But in pandemic monetary policy times, we’ve seen oil increase even though interest rates have stayed flat, earnings have been up and things are relatively OK.
The key thing is, though, is that the Fed changed their monetary policy strategy back in August 2020, where they allowed inflation to overshoot.
The years before, they were ‘pre-empting’ inflation.
This context is vital, since an interest rate rise now could upset demand globally, and therefore the demand for oil…
Which ultimately, will affect price.
Once again, Covid will play a part in the short-term, as OPEC+ meet at the end of the week to assess the overall demand picture and decide if they continue ramping up production.
Oil continued pushing lower on Friday as travel restrictions were announced.
Below we have Amazon, the tech & retail behemoth.
We’ve noted some structure here which we reckon to be pretty key.
We have a double top, a triple bottom in the middle at $3,171, and a double bottom at $2,878.
As the title states, support and resistance actually gets weaker the more times it’s hit.
Think about it…
If price keeps wanting to go one way, there is a higher probability that there will be another driver leading it back to that same price in the future…
More so perhaps than other technical levels.
Could Wednesday’s ISM Manufacturing be a catalyst for the stock to move lower?
Maybe if we consider how the big tech firms find their prices heading higher…
There’s something called the Discounted Cash Flow Model.
It basically says that a higher ‘risk free rate’ (normally the US 10 year yield) implies that future cash flows will be discounted more, meaning a lower valuation.
Right now, the US ISM Manufacturing PMI is elevated at 60.8…
What if that remains at about the same level?
What does that indicate for demand and therefore inflation (and off the back of that, might the Fed really think about tapering faster, sending rates higher)?
We’ll leave you to think about that based off the model…
But the funny thing is that models and theories break - we’ve actually seen yields head lower a lot of the time once tapering begins…
Which could have the opposite effect, provided the conditions are right.
Markets are great, eh?
One other thing to keep in mind is how strong Friday’s NFP numbers are, which could further accelerate the Fed’s decision to increase rates.
Again, this is something to consider from the previous section, whereby higher interest rates can affect risk assets based on the model described.
The forecast is 563,000 with the previous standing at 531,000…
It’s a strangely big week for the Fed!
All of this could go completely out of the window if the worst fears about the coronavirus variant are confirmed.
Volatility is likely to remain elevated so trade safely!
Not investment advice. Past performance does not guarantee or predict future performance.
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