Monthly Market Outlook

In September, the ECB raised interest rates again, while the Fed decided to adopt a very hawkish pause. Positive data from the US and the Fed members’ forecast for the Fed funds rate caused another rally in the dollar. Additionally, the US Congress averted another shutdown just hours before it could occur.

In October, the focus will shift to economic data, primarily from the US, and government funding talks in the US Congress. As we approach the end of October, the spotlight will once again turn to the Fed, depending on the strength of the incoming data.

Macro View

The U.S. government managed to avert a shutdown just hours before the deadline, and with the new legislation, the government will remain open until November 17. The decision-making process was undoubtedly like a roller coaster ride. Senate and House Republicans held differing views, and even within the House Republicans, there was disagreement. Notably, the legislation did not include funding for Ukraine. However, President Biden signaled that support for Ukraine would continue and mentioned that McCarthy is committed to passing a separate aid package.

Amidst the backdrop of a hawkish Fed and shutdown risks, the 10-year government bond yield has risen above 4.50%. After the deal, traders will be watching to see if the decline in bond prices continues in the short term.

The US job market continues to remain robust even amidst the massive rate-hiking cycle. The US economy is adding roughly 257,000 new jobs on average every month in the last twelve months, although the pace of job growth is gradually slowing. Open job positions are decreasing rapidly as the demand and supply in the job market are approaching a balance, just as the Fed intended. Despite this balancing act, the job market remains much stronger than expected. Fed members have revised down their unemployment forecasts by 0.3% for 2023 and 0.4% for 2024 and 2025, resulting in projections of 3.8% for 2023 and 4.1% for 2024 and 2025. Weekly continuing job claims have also been on a downward trend since April.

Inflation is on the rise once again, driven by changes in the base effect and surging energy prices. Month-on-month (MoM) CPI has come in at 0.6%, significantly higher than the desired 0.2%, while core CPI (excluding food and energy) stands at 0.3%. The combination of higher inflation, rising energy prices, and a strong job market increases the likelihood of a more hawkish stance from the Fed.

The manufacturing sector continues to appear weak globally, with services bearing the bulk of the growth burden. Because the services sector generates more jobs than manufacturing, wage-driven price pressures are keeping inflation high for the time being.

Chinese manufacturing PMI has crossed the 50 threshold for the first time since March, while the UK and EU PMIs are below 45, indicating rapidly declining manufacturing activity. The US Manufacturing PMI is also below 50, indicating a decrease in activity, but at a much slower pace and suggesting potential early signs of recovery.The EU’s PMI has been below 50 for more than a year, which is starting to pose significant problems. Financial conditions are tightening daily due to rate hikes from the ECB and negative money growth.

The manufacturing sector did not recover as early as expected, despite the increased demand for oil and many commodities. This led to the Bloomberg Commodity Index breaking the recent uptrend to the downside. Another factor contributing to this break could be the central banks adopting a more hawkish stance.

In light of a stronger-than-expected job market and a resilient economy, FED members have increased their growth expectations for 2023 significantly by 1.1% to 2.1% and by 0.4% to 1.5% for 2024. While the GDP forecast has been revised upward, the unemployment forecast has been lowered by 0.3% for 2023 and by 0.4% for 2024 and 2025. Despite a tighter job market and a stronger GDP forecast, the inflation forecast has been revised up by only 0.1%, and core PCE has been revised down by 0.2% for 2023, remaining the same for 2024.

However, Fed members foresee higher and longer funds rates to balance the strong economy. The peak funds rate forecast remains unchanged at 5.6%, but for 2024 and 2025, members anticipate two steps higher rates than what was expected in the June projection. This suggests that interest rates are expected to stay at peak levels for a longer duration than previously anticipated to cool down the strong economy.

Following this decision, the markets are pricing in one more rate hike with nearly a 40% probability and expect the Fed to cut rates in the summer of 2024. Market watchers will primarily focus on job market and inflation data in October to assess the likelihood of another rate hike.

ECB raised rates by another 25 basis points in September, but this move was perceived as a dovish rate hike. Although the ECB did not completely rule out the possibility of more hikes, they indicated that they might have reached the peak. The ECB revised up its inflation forecast due to higher energy price expectations but lowered the 2025 forecast to 2.1%, just above the medium-term target.

Following the ECB meeting and weak PMI data, the markets are not anticipating any more rate hikes, while rate cuts are expected to commence in the summer of 2024, similar to the Fed’s trajectory.The Bank of England decided to pause, with Chair Bailey casting the deciding vote. This decision was much more dovish than expected from the BOE. Both before and after the meeting, the GBP fell, influenced by lower-than-expected inflation data and the dovish stance of the Bank of England. The swap market expects another hike from the BOE, while rate cuts are not expected to materialize before September of next year.

Central Bank Meeting Calendar

Technical View

US 10-year government bonds are currently facing significant selling pressure. This pressure has intensified as the risk of a government shutdown increases, coupled with a more hawkish stance from the Fed, causing the 10-year bond yield to rise above 4.50%. The uptrend is still in progress, and the upper boundary of the trend channel has been aggressively tested. If a stopgap measure can alleviate some of this pressure, there is a chance that the short-term rising wedge could be tested, potentially providing some relief to bond traders.

However, it’s important to note that the risks have only been postponed for a few weeks, and with the possibility of strong economic data, another rate hike remains a possibility. The fundamental pressures on the bond market are still present, but there is potential for a short-term recovery throughout October.

Brent oil broke through the formidable $90 resistance level in September and surged. The increase in oil prices resulted from a combination of rising demand, low stockpiles, and supply shortages. Throughout September, the upper boundary of the uptrend channel was tested multiple times, and downward movements remained relatively weak. The formation of a short-term rising wedge could be an early signal for a correction, potentially leading to a retest of the old resistance, which has now become a possible support at $90. Meanwhile, upward movements could encounter resistance around the $99 level.

Precious metals had a challenging month due to the rising dollar index and tightening financial conditions. Among them, silver experienced the most significant decline, falling by as much as 10%. Gold, on the other hand, exhibited a relatively stable decrease, with prices dropping by as much as 4.8%. Interestingly, while the prices of most precious metals were falling, palladium, which has been one of the weakest performers this year, saw a modest increase of 1.25%.

The gold/silver ratio, which serves as a useful indicator for gold prices and typically exhibits a negative correlation, had a positive month. This had a detrimental effect on precious metals, particularly gold and silver.

10-year real yields have risen above 2.20% for the first time since 2008, which is increasing selling pressure on gold. Gold may face even greater challenges if the uptrend in real yields continues into October.

ETFs’ gold holdings continue to decline, and this trend accelerated even further in September. With rising real yields and the strengthening dollar index, ETF sell-offs are intensifying the downward pressure on gold. However, it’s worth noting that demand from China is currently supporting the gold market. The depreciation of the yuan against the dollar and the widening spread between the offshore yuan and the yuan fixing rate are driving additional demand for bullion, in addition to central bank purchases.

Nevertheless, if gold continues to weaken, private investor demand in China may also wane. Overall, the general fundamentals suggest that gold is still overvalued despite the decline it experienced in September.

Gold moved between the 144 and 233-day moving averages throughout September but broke out of the sideways movement in the last three days with a significant selloff. The 1840-1850 zone will be crucial for gold bulls. If the support zone holds, it could trigger a buying wave in reaction. However, the downtrend is still in progress, and a break to the downside could push the gold price toward the lower boundary of the trend channel, possibly even reaching 1800 or lower.

Since May, silver has been trading sideways in the range of 22 to 25 levels, accompanied by increasing volatility. Currently, the 21.40-22 support zone is being tested once again. However, this time, the previous upward momentum was much weaker, and it failed to surpass the 24 level. Furthermore, the uptrend channel dating back to September of the previous year is on the verge of breaking.

If the 22 support level is breached, it could trigger a panic selling scenario, potentially pushing the price down towards the 21.40 – 20.83 support levels. On the flip side, the sideways movement within the 22-25 range is still ongoing, and the 22 support remains robust. The significant selling observed last week may present a buying opportunity, as long as the 22 support level holds.

After breaking out of the wedge formation, the dollar is surging within a narrow uptrend channel. In September, the 105.40-105.75 zone was also breached, but now the index is retracing and testing this key zone as support. If this zone holds, the upward momentum may continue. However, if the trend channel breaks, the momentum could begin to shift against the dollar once more.

The stock markets had a very weak month in September. The MSCI World Index fell by more than 4.60% due to factors such as hawkish central banks, tightening financial conditions, and the risk of a US government shutdown. China’s weak economic recovery also contributed to the downturn. Among US indices, the Dow Jones had the most stable performance, with a negative return of 3.47%. Hopes for a manufacturing sector recovery persist, although there is currently limited evidence to support this notion. The Nasdaq and S&P 500 fell by 3.93% and 4.31%, respectively. In contrast, the DAX in Germany performed relatively better among its global counterparts, with a negative return of only 2.82%. The decline in the EUR/USD exchange rate and the ECB’s dovish stance relative to the Fed helped maintain a slight spread in September.

The VIX jumped toward 20 but continued to stay below the overall resistance level of 18.75. Despite the Fed’s hawkish pause and the risk of a government shutdown, the downtrend in the VIX is still ongoing.

The Relative momentum index’s buying signal did not gave fruit as the upward move stayed very limited the S&P 500 fell towards the lower line of the trend channel. The key level to watch for direction is 4200 and as long as it holds, any downward moves could create buying opportunities in the medium to long term. 4200 is close to lower line of the channel and was a massive resistance since the middle of 2022.

The FX market continued to witness a strong dollar index for yet another month. GBP and CHF emerged as some of the weakest currencies, losing more than 3% of their value against the dollar. Meanwhile, EURUSD fell by more than 2%. In contrast, AUD managed to stay resilient and rose against the dollar by 0.47%, particularly with a late September surge. This late surge in AUD may have been influenced by the rising CPI, strong PMI data, and the end of Chevron workers’ strike.

EURUSD has been experiencing a significant decline since the middle of July. The downward movement that originated from 1.1276 has now extended to nearly the 1.048 support level. The 1.06-1.0630 zone will be crucial for Euro bulls, as it represents the first line of defense against upward movements. If EURUSD can surpass this zone, the upward momentum may extend towards the upper boundary of the trend channel and then toward the key moving averages around 1.08.

On the other hand, the downward pressure is still prevailing, indicating a clear presence of a downtrend. Short-term price jumps could remain relatively weak as long as the trend persists.

According to the COT report, net non-commercial Euro positions are currently declining from their highest levels, which could have negative implications for EURUSD. It has been observed that whenever Euro long positions accumulate to excessive levels, EURUSD tends to experience significant losses. Since the 2008 financial crisis, there have been four instances where EURUSD exhibited such moves, resulting in an average retreat of 19.35%. Currently, as net long positions slowly come into better balance, EURUSD is facing another sharp sell-off. In previous instances, the largest decline in EURUSD was 14%, whereas the current decline stands at 5.83% from the recent peak. Additionally, the downtrend that has persisted since 2008 for EURUSD has shown its strength once more.

GBPUSD has experienced a significant decline over the past two months. The downward movement has not been characterized by panic but rather follows the ongoing downtrend. After testing the Fibonacci 38.2% support level, GBPUSD is attempting a minor correction towards the previous support at 1.23, which now acts as a key resistance for short-term movements. If it manages to surpass this level, 1.2482 could be the next target for GBP bulls.

The RSI has entered its most negative territory since September of last year when GBPUSD nearly fell below 1, which supports the bullish case. However, traders should exercise caution with long positions as long as the downtrend channel remains intact.

USDJPY is currently ascending within an uptrend channel and has recently moved above the 21-day moving average, heading towards 150. Despite adjustments to the bond limits and the threat of interventions, it appears that the yen’s decline is not being halted. As long as there is no intervention, USDJPY may sustain its upward trajectory. In the event of an intervention, the extent and duration of such intervention could determine whether sharp declines create buying opportunities, provided that the uptrend remains intact.