As 2022 draws to a close, the markets seem poised to head into a new phase.

But it’s all about the mid-term elections in the US now. It is becoming apparent equity markets are riding on the possibility of a divided government. At face value, this would seem counterintuitive to non-market folks, but for those who stare at computer screens watching for red flashing headlines, quite bluntly, gridlock means nothing can get done at the political level. But importantly, at this juncture, there will be no chance of left-field fiscal policy inputs, which is flat-out beneficial as it reduces Fed policy uncertainty.

While all sorts of positive historical returns are getting dished out when such an outcome occurs, what will be interesting is seeing this unfold against the backdrop of restrictive monetary policy settings.

I reiterate; however, the less hawkish tones reverberating through central banks over the last few weeks are part of the peak rates process, and this is the next phase for markets to ride.


Split Congress reduces the possibility of expansionary fiscal policy that feeds Fed rate expectations. Lower rates vol should carry into diminished equity and FX vol that benefits Growth equities, driving a weaker USD. Midterms-driven dollar weakness will also ignite long gold and industrial metals trades.


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With peak Fed getting priced in, the story is shifting from US yields and USD higher playbook to reducing saturated USD dollar longs.

One point of interest in the US fixed-income space is the street flagging numerous block sales in USTs during APAC hours. The common wisdom is that this could be foreign central banks selling Treasury holdings to fund FX intervention. This has been backed up to some extent by an apparent lack of interest in recent UST auctions from indirect bidders – a proxy for foreign monetary authorities or central banks and is further supported by data out of Tokyo showing that the foreign securities holdings dropped by $43.9 bn in October, while $42.9 bn was spent in supporting the Yen.


Rolling lockdowns in China, as Covid cases rebound, are catching oil traders leaning the wrong way. Last week oil traders were diving into the trade that no one owned, long oil on an early China reopening. With that narrative getting pushed back, coupled with a considerable build on US inventory data, implying dimming US demand, the recessionary crews are back out in full force this morning in Asia.


Gold has broken through most technical levels that were keeping it in check. I suspect CTA and fast money are squaring up short positions, not just in precious metals but also in G10 currencies.

As the ‘peak Fed’ theme draws closer and terminal rates converge around 5.0%, the USD higher momentum has taken a hiatus positively for gold.

Higher interest rate environments are traditionally not positive for commodities such as gold, but with peak rates driving US dollar weakness, gold is starting to shine brighter.


A liquidity crunch at the crypto exchange FTX resulting in a bailout by Binance, negatively impacted traditional financial markets, although US equities closed higher on the day. Bitcoin is up about 8% from the lows after recording a 17% decline over the preceding 24 hours; FTT, FTX’s exchange token, is down 75% over the past 24 hours. The extent to which these tokens were used as collateral to take out loans should help determine the fallout into the broader crypto space in the coming days.

So far, the liquidation chasers have been held to 18,000, but the daisy chain effect will likely take a few days more to play out.

Published Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT