Equities:
The slow grind higher in US equities persists with the S&P500
touching a fresh YTD high on Friday. Market volatility remains subdued as the
index remained within its ~1.5% trading range over the last 2 weeks. Paradoxically,
sentiment indicators and volatility gauges suggest a whiff of complacency
setting in as the festive season is around the corner.
Things were not so sanguine in China. The CSI300 and Hang Seng extended last week’s selloff and sank to new YTD lows, in part catalysed by Moody’s credit rating downgrade (which was fiercely rebutted by Chinese authorities). Commentators then quickly seized the opportunity to contrast the growing rift between India’s roaring stock market and Chinese markets stuck in the doldrums. In Japan, the age-old negative correlation between stocks and the JPY returned to the fore, with equities taking a hit as the yen surged (more on this below).
Commodities:
Energy markets continued their tumble following last week’s disappointing OPEC+ cuts announcement and renewed doubts about Chinese demand as the economic situation remains soft. Slight reprieve came on Friday after the US Department of Energy announced plans to purchase 3 million barrels of oil for refilling the Strategic Petroleum Reserve, helping WTI crude close the week above the psychological $70 level.
Spot gold kicked off a dramatic week in precious metals, surging to a record high above $2100 in usually-lethargic Asian Monday morning trading, taking out many stop losses along the way. Inflicting even more frustration, the entire surge higher was retraced within the same day by the time Europe opened for trading. While gold managed to hold within a trading range for most of the week, silver continued to slide throughout the trading week before escalating into a full-blown crash on Friday following stronger-than-expected US payrolls, capping off a bruising week down 9%. No doubt the whacky price action in precious metals caught the attention of mainstream media – I recall seeing searches for “gold price” trending on Google.
Cryptocurrencies:
Another banner week for crypto as Bitcoin pushed above $44,000. Other large-cap L1s surged to fresh YTD highs (eg. ETH, SOL, AVAX). Mainstream interest in crypto is resurfacing, based on empirical and anecdotal evidence (own observations), and the stars appear to be aligning for a new bull run. Planning to pen my thoughts on crypto if I can find the time.
Spot FX:
The US dollar regained some luster this week after a soggy November, gaining ground against most major currencies except the JPY, which saw the largest one-day surge since last December after speculation of an earlier-than-expected BoJ policy normalization following Deputy Governor Himino’s comments that a properly executed exit from negative rates would reap economic benefits. JPY strength was further catalysed by Thursday’s extremely weak 30-year Japanese Government bond auction which saw the biggest tail on record.
Interest Rates:
Front-end rates in major markets largely reversed the previous week’s rally after US NFP, while persistent buying interest in long-dated government bonds kept downward pressure on long-end yields. Japanese Government Bonds (JGBs) were in the spotlight after yields jumped on a ferocious selloff following Himono’s comments and lackluster 30y auction. Notably the selloff in 10Y JGBs opened a rift with 10Y Treasuries, leaving one to muse whether the tail (JGBs) could soon wag the dog (Treasuries) in spurring a reversal of last month’s sharp Treasury rally.
Over in short-term interest rates, markets walked back pricing for a March FOMC cut following a firm employment report on Friday. Rate cut pricing for the European Central Bank (ECB) however remained sticky as markets continued to look through ECB officials’ often half-heated attempts to pushback against cuts pricing.
US inflation breakevens tracked the trajectory of oil prices, bouncing higher after touching the lowest levels in 2 months. In the cross-market space, Australian 10y bonds outperformed their US counterparts, as traders were unimpressed by the neutral tone struck by the Reserve Bank of Australia (RBA), following a softer-than-expected inflation print last week and promptly set about fading what remained of the rate hikes priced for early-2024.
Credit spreads remained priced for a no-landing economic scenario, with high yield spreads continuing to tighten as sentiment remained buoyed into year-end. US CCC spreads (in deep junk territory) continued to tighten from their late-Oct highs.
Volatility:
Reflecting the subdued realized volatility in large-cap US equities, the VIX closed at a new YTD low on Friday. Perhaps another sign of market complacency setting in, S&P500 options skew (as measured by the Nations SkewDex Index) cheapened to a new low this week – hedging tail risk has never been cheaper on a relative basis.
The Week Ahead:
Next week brings a litany of central bank meetings. Among the G10, the Fed, European Central Bank, Bank of England, Norges Bank and the Swiss National Bank are due on Wednesday and Thursday.
US CPI on Tuesday will be closely watched and will likely determine market direction for the remainder of the year. A 3.1% y/y headline reading is expected. A slight miss or in-line print would likely reinforce the notion that inflation has been beaten and rate cuts can now commence in 1H2024, likely sparking another rally into year-end should the Fed maintain its current posture at the following day’s FOMC decision. It would take a large beat on the inflation front to shock markets into reversing the rate cuts priced, given how deeply entrenched the disinflation narrative (albeit well-supported by data) has become.
Things were not so sanguine in China. The CSI300 and Hang Seng extended last week’s selloff and sank to new YTD lows, in part catalysed by Moody’s credit rating downgrade (which was fiercely rebutted by Chinese authorities). Commentators then quickly seized the opportunity to contrast the growing rift between India’s roaring stock market and Chinese markets stuck in the doldrums. In Japan, the age-old negative correlation between stocks and the JPY returned to the fore, with equities taking a hit as the yen surged (more on this below).
Commodities:
Energy markets continued their tumble following last week’s disappointing OPEC+ cuts announcement and renewed doubts about Chinese demand as the economic situation remains soft. Slight reprieve came on Friday after the US Department of Energy announced plans to purchase 3 million barrels of oil for refilling the Strategic Petroleum Reserve, helping WTI crude close the week above the psychological $70 level.
Spot gold kicked off a dramatic week in precious metals, surging to a record high above $2100 in usually-lethargic Asian Monday morning trading, taking out many stop losses along the way. Inflicting even more frustration, the entire surge higher was retraced within the same day by the time Europe opened for trading. While gold managed to hold within a trading range for most of the week, silver continued to slide throughout the trading week before escalating into a full-blown crash on Friday following stronger-than-expected US payrolls, capping off a bruising week down 9%. No doubt the whacky price action in precious metals caught the attention of mainstream media – I recall seeing searches for “gold price” trending on Google.
Cryptocurrencies:
Another banner week for crypto as Bitcoin pushed above $44,000. Other large-cap L1s surged to fresh YTD highs (eg. ETH, SOL, AVAX). Mainstream interest in crypto is resurfacing, based on empirical and anecdotal evidence (own observations), and the stars appear to be aligning for a new bull run. Planning to pen my thoughts on crypto if I can find the time.
Spot FX:
The US dollar regained some luster this week after a soggy November, gaining ground against most major currencies except the JPY, which saw the largest one-day surge since last December after speculation of an earlier-than-expected BoJ policy normalization following Deputy Governor Himino’s comments that a properly executed exit from negative rates would reap economic benefits. JPY strength was further catalysed by Thursday’s extremely weak 30-year Japanese Government bond auction which saw the biggest tail on record.
Interest Rates:
Front-end rates in major markets largely reversed the previous week’s rally after US NFP, while persistent buying interest in long-dated government bonds kept downward pressure on long-end yields. Japanese Government Bonds (JGBs) were in the spotlight after yields jumped on a ferocious selloff following Himono’s comments and lackluster 30y auction. Notably the selloff in 10Y JGBs opened a rift with 10Y Treasuries, leaving one to muse whether the tail (JGBs) could soon wag the dog (Treasuries) in spurring a reversal of last month’s sharp Treasury rally.
Over in short-term interest rates, markets walked back pricing for a March FOMC cut following a firm employment report on Friday. Rate cut pricing for the European Central Bank (ECB) however remained sticky as markets continued to look through ECB officials’ often half-heated attempts to pushback against cuts pricing.
US inflation breakevens tracked the trajectory of oil prices, bouncing higher after touching the lowest levels in 2 months. In the cross-market space, Australian 10y bonds outperformed their US counterparts, as traders were unimpressed by the neutral tone struck by the Reserve Bank of Australia (RBA), following a softer-than-expected inflation print last week and promptly set about fading what remained of the rate hikes priced for early-2024.
Credit spreads remained priced for a no-landing economic scenario, with high yield spreads continuing to tighten as sentiment remained buoyed into year-end. US CCC spreads (in deep junk territory) continued to tighten from their late-Oct highs.
Volatility:
Reflecting the subdued realized volatility in large-cap US equities, the VIX closed at a new YTD low on Friday. Perhaps another sign of market complacency setting in, S&P500 options skew (as measured by the Nations SkewDex Index) cheapened to a new low this week – hedging tail risk has never been cheaper on a relative basis.
The Week Ahead:
Next week brings a litany of central bank meetings. Among the G10, the Fed, European Central Bank, Bank of England, Norges Bank and the Swiss National Bank are due on Wednesday and Thursday.
US CPI on Tuesday will be closely watched and will likely determine market direction for the remainder of the year. A 3.1% y/y headline reading is expected. A slight miss or in-line print would likely reinforce the notion that inflation has been beaten and rate cuts can now commence in 1H2024, likely sparking another rally into year-end should the Fed maintain its current posture at the following day’s FOMC decision. It would take a large beat on the inflation front to shock markets into reversing the rate cuts priced, given how deeply entrenched the disinflation narrative (albeit well-supported by data) has become.
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