We start feeling the cracks in market optimism: the bonds extended their rally yesterday after the inflation data in Britain surprised to the downside, but major US indices saw a sharp retreat. A 12% plunge in FedEx – which acts like a gauge of economic activity, the overbought market conditions in major global stock indices and the awareness that a further fall in bond yields weaken the idea of soft landing triggered a much-needed retreat in equity valuations.
The British FTSE 100 is fueled by a dovish shift in Bank of England (BoE) expectations, cheap sterling and returning appetite for energy stocks. Appetite for the Stoxx 600 is limited near last week’s peak, while the S&P500 recorded a sharp fall from near ATH, and Nasdaq 100 also saw a sharp retreat after hitting a fresh ATH earlier in the session. European futures are in the red, while US futures are in the green.
We know that a further correction in equity valuations is on the cards. We just don’t know what the trigger will be.
A positive breakout?
The barrel of US crude is still working on clearing the $74/75 resistance. Yesterday’s rising US inventories somehow broke the positive momentum. But strengthening trend and momentum indicators hint that a positive breakout is possible, and a potential rally could send the barrel of crude to 200-DMA, which stands a touch below the $78pb. Yet the upside is seen limited as any significant rally in oil prices will boost global inflation expectations, crush the dream of seeing the central banks call the end of policy tightening and increase recession odds. And rising recession odds are negative for oil.
Enjoy while it lasts
Investors could still enjoy a soft US inflation read for November, and the latter could keep the bond rally intact into Xmas. If that’s the case, the US dollar will remain under pressure. The latter will allow the euro to extend its gains against the US dollar. The pair could make another attempt on the 1.10 mark. For those who love pure tech plays, the current cup and handle formation in the EURUSD is a bullish technical formation and could be interesting for entering fresh long positions. But note that fundamentally, the euro’s strength against the US dollar is not perfectly deserved. The strong US economy calls for a hawkish Federal Reserve (Fed) reaction, the soft European growth and falling inflation call for a dovish European Central Bank (ECB) stance. But what we see today is the exact opposite. So, if the central bankers and the market come back to their senses, the EURUSD should not rally above 1.10. But it may take time before the rectification happens. Today’s US growth number could remind us that the US economy grew more than 5% in Q3.
