Monthly Market Outlook

In November, the main theme was the decline in inflation. With the subsiding geopolitical and US shutdown risks, the focus shifted to inflation data ahead of the final meetings of central banks for 2023. The significant slowdown caused rate cut expectations to rise.

In December, the Fed and ECB will update their economic forecasts in light of the new data from the last three months. Additionally, markets will also focus on rate cut expectations, bond yields, and budget talks in Eurozone countries.

Macro View

The inflation is coming down fast. The new inflation data, especially from the Eurozone, seemed like good news for the markets. But it might be coming down too fast. The ECB expected a 5.6% average for 2023 inflation at the September meeting. The new early data for November fell to 2.4%, and with that, the average fell to 5.7%. Unless the December data comes in at 4.5% or higher (almost impossible) and early data is not revised up significantly, the ECB will have to revise the 2023 and 2024 forecasts down. In the Bloomberg survey, even the lowest inflation guess was higher than 2.4%. On a monthly basis, negative 0.5% was the lowest inflation data since the 2020 Covid-19 slowdown. Another key point from the Eurozone’s latest inflation data was the comparison with the US. The EU and US inflation peaks have a 4-month separation between them. EU inflation seems to be falling a lot faster than the US due to weak economic growth. Weak growth, low inflation data, and a slowdown in fiscal support could increase negative pressures on the Euro as well.

On the US side, recent CPI and PCE data increase hopes for a soft landing. As inflation is coming down, GDP continues to sail above average. Including the third quarter, US GDP is near or above its long-term average for the last five quarters, which is a great surprise considering the tightened financial conditions.

However, the strong growth might slow down in 2024 or even in the fourth quarter as household economics begin to come under pressure with high inflation and below-average savings relative to disposable income. Despite real wage growth turning positive in recent months, the 2021-2023 period showed the worst wage growth by far. Pandemic savings vanished, credit card debt piled up, and households cannot avert college debts as well. If the jobs market begins to slow, the effects of low wage growth and savings will multiply. Although it might be too early to call a significant slowdown yet, the US economy has shown its resilience and fooled economists many times since the COVID shock.

The Fed is playing its hand according to recent resilience, and it is a safe bet for now. The markets expect rate cuts as soon as March (with a 75% probability); however, this might be too optimistic or even pessimistic because it will almost need a recession-level slowdown for the Fed to hit the emergency brakes that early. Fed members already expect a slowdown and below-average growth. With that in mind, a first-half rate cut might have a lower probability. However, the job market will play a significant role for the US economy. A more-than-expected slowdown in the job market might cause a significant economic downturn. In that case, as long as there is no recession, the first rate cut might come closer to the May meeting. Continuing claims might be giving an early signal for such a case. The job re-entering time seems to be getting longer and longer. Despite no significant change in new claim numbers, continuing claims are rising, even at a faster rate. The next payroll change data this week will be more important to Fed members before drawing their forecast.

PMI data shows that the EU economy continues to diverge negatively from its counterparts. The UK composite PMI returned to over 50, and the US composite PMI stabilized in the growth zone, indicating a fast increase in economic activity. The recent ISM manufacturing data showed that the expected manufacturing rebound has not started yet, but the recovery of new orders gives hope for a pickup in the manufacturing sector. On the other hand, the EU still shows a fast decrease in activity in the manufacturing sector, mostly because of weak German production. China is still facing headwinds in the construction sector, but with the new possible loan support, the giant economy might show some signs of recovery in 2024.

Perhaps the only good news from the Eurozone seems to be that consumer confidence is recovering. There is a positive change in the expectation of a recovery in 2024 seen in consumer confidence, as well as in GFK and ZEW data. The anticipation that the worst is behind us can be a good thing if it lasts, and the recovery might start earlier than expected. However, consumer confidence is still way below the long-term average after the worst period since the data started.

In the UK, Sunak and Hunt revealed a plan for tax cuts while simultaneously aiming to reduce the budget deficit. The plan did not cause panic as with the Truss tax cuts. With the help of downward pressures in bond markets globally, 10-year gilts even fell.

Central Bank Meeting Calendar

Technical View

The US 10-year government bond yield tested the 5% barrier multiple times in October and at the beginning of November. However, due to inflation coming down and the Fed being at the end of its hiking cycle, bond bulls held their ground each time. This level could be seen as advantageous for the long-term investor. Despite the turnaround pressure, the trend fromm May was also broken.

But the significant positive move might be coming to an end. Powell and some other members have repeatedly stated that higher bond yields tighten financial conditions and reduce the need for extra rate hikes. A too-fast drop will ease conditions and might cause the Fed to hold higher rates longer. Additionally, possible profit-taking actions might be due as well. For that reason, the 4%-4.15% zone can be a good target, with a horizontal and mental support line, Fibonacci 23.6% level, and the trend from the start of 2022 all converging. If this zone breaks as well, we might see some negative Fed speak, so bond bulls should tread carefully in each case.

Brent‘s trend completely turned around starting in October. There is an expectation that economies will cool down further, and growth will be weak in 2024. With that in mind, there is an expected excess supply in 2024. Because of that, OPEC members discussed further production cuts, but both meetings ended with no official decisions. Instead, there was an agreement with unofficial cuts, each announced on their own. The lack of commitment and an official agreement did not impress oil traders. The downward pressure might continue for the remainder of 2023, and as long as the downtrend holds, upward moves might only serve as sell opportunities.

Precious metals, except palladium, enjoyed good monthly returns in November. Silver led the way with a return of more than 11%, almost all of it in the second half of the month. Gold was fueled by the surge in silver, falling bond yields, and a weak dollar index. Although the dollar index recovered some in the final days, gold still managed to surge further even further. Platinum fell and then recovered along with palladium but positively diverged in the last week of November.

The gold/silver ratio and the negative correlation of gold recovered after reversing for a while in October. Silver continues to lead the way for gold.

The gold rush did not find much support from ETFs. ETF gold holdings stopped coming down for some time, but in the final leg of the surge, ETFs sold some more of their positions. This will raise questions about the permanence of the upward moves in gold.

Gold continues to surge in November and reached the 2050-2075 zone, which was tested three times since 2020 and halted advances each time. The total return from the October dip reached nearly 14.50%. The market will now follow the 2075 resistance. If gold is able to break it, there is a chance to extend the upward moves towards 2135. However, fundamentals are heavily against the bullion for now.

Silver bulls had massive returns in November. Now the price is getting close to critical points. Silver has created a setup perfect for an extended ABCD formation, where the “D” level is still unclear but the most likely location will be 25.60 at the 123.6% extension level. Other possible locations could be 26.04 and 26.75. Of course, there is a chance of silver surging and pushing past further resistances, but after this massive surge nearing a 25% return from the October bottom, some profit-taking correction might be due. The “D” level has a good chance of being the catalyst for it, wherever it will be.

The dollar index extended losses to 61.8% of the July-September surge, almost entirely in one month. After the correction, the dollar index is trying to recover from the 102.55 support but still hasn’t been able to capture the 200-day moving average yet. As long as the 102.55 support holds, the dollar index can make another leg up with Euro weakness. The 200-day and 100-day moving averages can be the first key resistances that need to be captured for further upside. Above them, 105.75 can be targeted. If the upward moves extend further, there might be a possible ABCD pattern forming for the dollar index as well.

The stock markets enjoyed solid returns amid dollar weakness. The correlation between the dollar index and stock market returns extended further into negative territory. Most of the performance came from big stocks, and because of that, Nasdaq had a better performance in November with a 10.69% return. After staying weak for some time, DAX surged more than 10% as well, with recovering sentiment. Both the S&P 500 and Dow Jones indices also gained over 9% returns, with the MSCI World Index rising 9.65% in November. After surging more than 12% within November, Nasdaq experienced a mini correction, while Dow Jones relatively negatively diverged, closing the gap in the final days of the month.

The VIX has returned to pre-pandemic levels once more as stocks surged. The momentum of stocks might start to wane, and for a possible correction, traders should follow daily closes above 13.5 as an early signal. However, the main trend for the VIX still points towards the south over the medium term.

The S&P 500 fell hard from July to November, but in just one month, it gained back all of these losses with a massive surge. Now, the July top is being tested once again. After surging nearly 10%, a correction might be due. It might be up to the dollar index in the end. If the dollar index holds its support, the upward momentum might falter for the S&P 500. For downward moves, 4400 could become a good support for the next step of more upside. Before that, the 21-day moving average can create some support as well. Over the medium term, the uptrend is still ongoing, and if the previous top is broken with a dovish turn from the Fed at the December meeting, the momentum might stay strong with low VIX and a weakened dollar index. In that scenario, the index will have significant upside potential going into 2024, reaching above 4800.

The FX market enjoyed the weak dollar index. AUDUSD rose more than 5.35% since the start of November, but with the weak CPI data from last week, it might slow in the coming weeks. After rising as much as 4%, EURUSD falters with weak data, especially the inflation closing towards the ECB target a little too early. Despite the retreat of EURUSD, GBPUSD holds its ground and rose nearly 4.58%. CHF gained nearly as much as GBP as well. JPY still showing weaker performance despite being near the key 150 level. USDJPY fell only 3.21%.

EURUSD rose from the 1.048 support and pulled back to the broken uptrend once more. After testing the broken trend and the 1.096 resistance for a couple of days, it finally began falling. The 100- and 200-day moving averages are holding the downward moves for now, creating a support zone around 1.08. If the Euro exhibits the weakness expected due to fundamentals, it might continue its drop towards 1.048 once more. Regarding upward moves, 1.096 and 1.1050 might continue to be the main resistances to follow in the final month of 2023.

EURUSD is in a long-term downtrend starting from 2008. Currently, the price is near the trendline, which is just below 1.1450. Whenever the trend is tested with a small or larger margin, Euro net long positions in the futures market seem to make tops. As the price gets lower, the positions at the tops get higher. So far, the trend has remained, and the downward moves from the tops have been significant, ranging from 14% to 24.57%. The last one was during the Covid-19 pandemic, and EURUSD retreated nearly 21%, towards below parity. Now, there is a good chance that EURUSD is forming another top, so in 2024, with the help of weak Eurozone fundamentals, another move below parity is a possibility unless the trend breaks.

Despite the gloomy outlook for 2024 and negative fundamental indicators, the EUR has a positive seasonality effect for Decembers. Over the last 10 years, EURUSD lost ground only two times in Decembers, with a 0.99% average return. However, the first three months of the new year, especially Februarys, often had a negative seasonality effect. So, if EURUSD is to make a final upward move, it happen in December.

GBPUSD broke the downtrend with a weak dollar index and surged toward the 61.8% level. After the sharp rise, the movement stabilized between the 50% and 61.8% levels of the July–October retreat. The direction might depend on the dollar index and further talks about tax cuts in December.

USDJPY took advantage of the weak dollar and fell from the previous top near 152. Pricing over 150 continues to be critical due to possible FX intervention talks. If the dollar index is able to recover, traders will have a hard time with intervention talks and BOJ speculations. On the other hand, a 1-year long downtrend is being tested now, and the 146-147 zone is an important support zone. A break below might finally give some relief to Yen bulls and trigger further downside.