November Report
Political uncertainty, crypto-like reaction from the tech giants after the earnings, changing central bank trends. October, the first month of the final quarter brings big changes to the markets.
The final one could come from the FED this week and change the dominance of the dollar index or upset the markets yet again by maintaining the current, hawkish stance.
Macro View
United Kingdom’s political chaos ended with another prime minister change. Truss, first try to reverse policies but could not stand against the pressure within the party and resigned. After the resignation, Sunak takes the prime minister role and promised financial stability. Now, eyes turned to the Bank of England.
The markets are pricing a 75 basis point rate hike in this week’s meeting, just one day after the FOMC. But the hiking path is much more unclear than FED and ECB. Major political struggles and big gilts swings cause a lot of uncertainty. But one thing is clear, the Bank of England will
begin the QT this month and shrink its balance sheet. If BOE keeps the rate hike expectation similar to the market GBP might be affected positively. Sunak’s new fiscal policy steps are unlikely to cause big shocks to the markets like Truss’s
FOMC meeting this week could be the main driver for markets throughout the whole month and maybe months to come. The futures market pricing 75 points of a rate hike with %100 probability. If that happens, Fed would have reached the %4 on the upper band. Almost all of the FED members said that %4.50-%5 is the peak target for the rates and the final prediction of the September meeting was %4.4 with %3,9 – %4.6 range for 2022 and %4.6 with %3.9 – %4.9 range for 2023.
This means FED will only have 100 basis points of rate hike remaining at maximum. FED, almost always moves the market expectations before making a decision. Now, it might want to prepare the markets for smaller hikes. This meeting perhaps the last 75 points hike will be seen in this hiking cycle. But the key point is what comes next? That is where the markets and FED is diverging, if only a little.
Currently, the markets expect to reach a peak rate at March or May meeting. After that rate curve is expected to turn to the downside slightly while the FED has been trying to flatten this curve to decrease inflation expectations for the medium term. Members nearly achieve that goal because the curve is flatter before the Jackson Hole meeting and inflation expectations fell significantly. If the extra hawkish stance changes about how long the peak rate is preserved, the dollar index will lose a lot of dominance in the coming weeks.
US midterm elections are nearly here. This month’s elections will be a close one. Democrats hoping to gain additional seats but it could go either way. Biden’s latest remarks about taxing the oil companies extra will be only possible with a democrat majority. But if republicans gain just one more additional seat, things get only worse for Biden, who already has very low approval numbers.
Europe gas situation turned a lot better than the market participants expected with the help of warmer autumn. Gas stocks are almost shy of %95, a lot better than the 10-year average and probably enough for a winter without any major heating crisis.
For the moment, EUR bulls are happy with the gas levels. The Netherland’s spot gas price even turned negative for a little time because of limited available stock. January 2022 futures fell from over 300 to 127 while January 2024 contracts were just above 100. The situation is expected to get better but if the expectations of the Ukraine war continue into late 2023, pricing could worsen pretty quickly.
Globally, recession risks are intensifying. Tighten monetary policies, the Ukraine war, gas troubles, high inflation troubling food situation worsen the economic outlook. European central bank member de Cos said that in Eurozone, the economic outlook darkened significantly. Europe’s main trouble is still gas and the inflation it creates, despite the positive developments about gas stocks. Now the ECB starts to tighten with 75 basis points and is ready to discuss reducing its balance sheet, things might get even worse, at least in the coming months.
In China, Xi grabs even more power. But this power is not helping the economy. The low vaccine rates with the zero-covid policy are taking a heavy toll on the economy while the real estate debt problem is still ongoing. White House’s latest chip decision will start to affect badly the tech sector over the medium term.
In the US, a lot of advanced data from local FEDs and the PMIs are hinting at a slowdown. JOLTS data shows a decrease of more than a million job openings, which is the first sign of bad news for the jobs market. Despite that, a reliable increase of job increase still ongoing is really positive. The probability of a recession median is %60 according to analyst estimates but been rising almost every month this year.
The composite PMI data from the US, UK, Eurozone, and China is showing the economy starting to slow down, and the pace of this slowdown picking up.
Reserve Bank of Australia and Bank of Canada made lower rate hikes and surprise the markets in October. RBA made 25 basis points of a rate hike (expectation:50) and Bank of Canada made 50 basis points (expectation:75). Slowing economic activity was the main motivator for the dovish hikes. These dovish stance changes increase the hope for a possible, slightly less hawkish FED.
Technical View
10 -year yield made a new top over the %4 this in October, near the upper line of the uptrend channel. But, if FED uses just a slightly dovish tone at this meeting, it might come down to %3.90 support and fall to %3.50.
Oil and metal prices are affected negatively by the rising recession expectations. Dr. copper is pricing the recession heavily. The price has been flat for a few months despite dangerously low stocks.
OPEC decides to decrease the oil output by 2 million barrels a day which prevents the steep downtrend to continue but the price exit the downtrend horizontally. White House continues selling strategic reserves to prevent big jumps but reserves getting lower fast while Russian oil price cap implementation might increase the upside pressure despite the looming recession.
Precious metals performed very differently from each other in October despite their high correlation. Palladium was the worse one with a more than %16 fall. Gold is down %1.6 while silver’s up %1.84. Platinum was the best performer among them.
Gold fell by more than $400 since March and the downtrend continues. The safe-haven demand fell sharply because of the surging real yields. They have had over %80 negative correlation for the last five years. Despite recession risks, high inflation, and the Ukraine war, 10-year yields offer a very good alternative to gold and challenging safe haven status, at least for now.
Silver has gained a lot of ground against gold lately, which usually results in positive returns for precious metals during those times. Silver is less used for investment relative to gold and the green energy transition increases the demand for bullion. Still, the uptrend continues for the gold/silver ratio in benefit of gold for the moment.
Gold has been pricing over 1675 since the covid-19 crisis. The major support hold the gold and rejected the down moves more than 7 times but started to weaken in September and then broke in October. Now gold is testing it upward. If the former support now resistance holds, gold has way more to go. Relative to real yields, the downside potential is exceeding 1100. But a positive momentum shift in the dollar index can change this pessimist outlook. This month, 1620 is the first major support. A downside break might open the door for down moves targeting 1550.
Silver fell sharply in summer and now moving flat above the 18-18,50 zone. The main pricing
zone might stay the same between 18 and 20. Above 20 runs might exceed 22, the major post
covid era until broken this summer, now the main resistance in the medium term. For shorter
timeframes, the 200-hour moving average works splendidly well as support–resistance or return-to-mean strategies for more than a year.
The dollar index is testing the upper line of the trend channel which is active since 2008-2011 top and bottom. After the double bottom in early 2021, the index surged to 115 from 90. Now the upper line reached, FED hiking cycle nearing its end, and the dollar dominance might start to ease a bit. 109.50 and 100-day moving averages are key supports for the short term and a downside break might lead prices to 104 over the medium term. But, if FED keeps its hawkish tone at this week’s meeting, the dollar might want to reach its latest top again.
The stock markets recover in October with slower rate hikes of RBA and BOC. The Truss – Sunak change also helped. Dow Jones rise %11.89
while tech-heavy Nasdaq only up %2 because of earning disappointment from some of the tech giants. DAX surged %10 with lower gas prices. Again, the FOMC tone will be the main driver of the stock markets in November.
The S&P 500, reach the middle point of the 4325 – 3491 fall after getting a buy signal from the relative momentum index near the lower line of the trend channel. Now it can go both ways from here. In November 4000 and 4150 might become the key resistances if the middle point, 3900 breakout happens. On the other hand, if bears take control again and hold the 3900, a fall to the 3475 – 3575 zone can happen again.
One key note: For the last 10 years, in Novembers, S&P 500 has only one negative month which was last year with a %0.83 fall. Novembers is S&P 500’s favorite month with a %2.69 return, the highest of all months. FX crosses felt the falling dollar index in October. EURUSD rise %0.69. GBPUSD got a boost from Truss’s resignation and rise % by 3.16. USDJPY rise in favor of the dollar despite FX intervention. AUDUSD fell %1.61 after the Reserve Bank of Australia surprised the markets with a lower-than-expected rate hike.
EURUSD, finally past the upper line of the trend channel which started early this year and prevent upside moves 7 times. As FOMC is closing, EURUSD is testing back the broken trend. But the trend has really broken or this is just another bull trap? This question will likely be answered after the FOMC. 0.9850 and the orange trend, 0.9775 are the key supports. Below the short-term uptrend, EURUSD might return to bears’ control again. But if the retest becomes successful and the price picks up again, 1.034 might be targeted late this year.
After nearly falling to parity, GBPUSD got a massive boost, first from the Bank of England, then from Truss’s backstep from her policies, and finally her resignation. The first week of November will be important for GBPUSD. 1.16 is a major resistance being both the Fibonacci %38.2 retracement level and the downtrend line. If a breakout to the above occurs, the door of the middle point of the recent fall, 1.2 will be opened. But as long as the trend holds, downside pressures might rise again for the month.
USDJPY continues to rise despite two interventions, shown with red arrows. Bank of Japan’s ultra-loose policy has even gotten looser lately. The BOJ’s upper limit for 10-year treasury yield, %0.25 tested multiple times. Because of that, the Bank of Japan buy more assets than previously planned. This resulted in USDJPY pushing over the 150 psychological resistance. After the October intervention, USDJPY is ranging between 145 and 150. The uptrends middle point is also near 145 which makes it a powerful support. As long as it holds, the 150 barrier might be tested more and more aggressively. A downside break however might bring Japan’s finance minister a temporary relief.
