Even though the soft US CPI challenged the biggest conviction trades, markets are in a regime where more evidence is needed to push forward central themes.
The soft October CPI print fueled Fed-pivot optimism, but Fed speakers pushed back last week by still seeing a higher terminal rate. China easing covid restrictions saw everything with even a whiff of China exposure trend higher. Still, the market wants to see China remove all zero-covid policies and provide more growth support.
Amid this flux, the market will likely run contrarian until the data confirms a new trend. So, when narratives lean too far to one side of the story, risk-reward tilts toward the other; contrarian plays will kick in.
Data is very mixed, with consumer spending more resilient than expected. However, rates-sensitive sectors, such as housing, are slowing sharply, as underscored by last week’s NAHB homebuilder survey.
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Another tug-of-war in STIR markets ensued as a robust UK CPI print and hawkish pushback from Fed and ECB speakers derailed the pivot train reminding everyone of the perils of chasing stocks higher on speculative rate adjustments.
However, with fast money, who would typically seize the hawkish moment pretty much sidelined, for now, it is easier for pivot mania to push back against Fed guidance; hence stocks remain supported by the fear of missing out.
Crude oil prices collapsed further during Friday’s New York session before recovering into the NYMEX close as the correlation disconnect kicked in. The recent extreme downside in oil is quite head-scratching for many who were seriously wrong-footed, given that China has removed some of the covid-19 restrictions, which should drive up demand. However, the keen driver of the prompt downside momentum is the growing unease that China will not loosen covid lockdown policies because infections are rising again.
And while correlation traders/algos may have thought the move was too large and went too far compared to other China-sensitive assets, price action suggests portfolio investors have abruptly reversed course dumping the China reopening plays in favour of the consensus coalescing around a likely recession next year. Oil prices will bear a significant brunt if such a regime shift plays out.
If you position the dollar wrong, you probably get everything wrong, so the multi-million dollar question on investors’ minds is, where does the dollar go from here?
Having ridden the ‘Fed pivot’ and ‘China reopening’ themes over the past few weeks, the FX market appears to be consolidating. Fed speakers continued the pushback of the pivot gang by signalling a higher terminal rate. However, the diverging stories told by strong retail sales and weak manufacturing surveys have left markets scratching their heads on where the USD goes next as liquidity worsens going into Thanksgiving week.
While it is tempting to run big short on dollar books for the eventual Fed and China ” pivots.” It is also equally as compelling to extrapolate dollar strength after years of bears being disappointed. So you can be patient for the next big dollar move and trade dollar-neutral positions until the pivot lights at the end of the tunnel are flickering a bit brighter. Clearer signposts will allow FX markets to get ahead of any China reopening or actual Fed pivot.
Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT