Quit paying attention to the pace and start paying attention to where the endpoint is going to be

There has been a noticeable shift in the market following last week’s inflation reading in the US, but Fed speakers pushed back, as expected.

Big shift

There has been a noticeable shift in the market following last week’s inflation reading in the US, with investors turning increasingly risk-on, piling back into tech and speculative names, with the dollar pulling back in support. The S&P 500 finished the week up 5.9%, its best week since June, while the Nasdaq Composite rose more than 8% for its strongest weekly advance since March and the Vix declined to its lowest since August. ARK Innovation fund jumped 24% in two days, whilst shares in mega-cap tech also rallied strongly from oversold levels in the wake of the earnings surprises. European stock markets also posted their best week since March, though the FTSE 100 ended the week on a bit of a soft note, partly on the stronger pound and partly because the London market, due to its defensive, dividend/value make-up and lack of growth/tech making it a bit of a safe haven this year, lost a bit of lustre as investors turned more risk-on.

Still a ways to go

Fed speakers pushed back, as expected. "We're at a point we can start thinking maybe of going to a slower pace", said Fed governor Waller over the weekend but "we're not softening...Quit paying attention to the pace and start paying attention to where the endpoint is going to be. Until we get inflation down, that endpoint is still a ways out there.” This aligns with what Powell said at the last meeting – higher terminal rate, but possibly slowing down from the clip of 75bps at every meeting. Higher for longer is the message but markets are looking at any good news as a chance to build. Markets tend to overreact on the way up and the way down – bulls and bears can get cut up in this kind of market dislocation. I reiterate what Powell said only one week ago, when he stressed the “need for ongoing rate increases...ground left to cover...it is very premature to be thinking about pausing". He said the Fed would need to see “a series of down monthly readings” on inflation for evidence that Fed policy was working. But he also said he’d “never thought of that as the appropriate test for slowing the pace of increases”. Big thumping rallies like Thursday’s are only possible in a bear market and the final flush is yet to come.

Democrats cling on

The Democrats retained control of the Senate by securing Nevada. With the Republicans taking the House of Representatives it means no one party has overarching control, a situation which increases the likelihood of regulatory gridlock, which the markets quite like. The main thing about this election was getting it out the way, and that it’s done means the focus is clearly on the Fed running into December.

Markets

European stock markets trade broadly higher as the risk-on mood persists. Hong Kong rallied as China took tentative steps to easing some covid restrictions by reducing the amount of time travellers must quarantine, whilst PBOC easing for the property sector was also seen as a positive for risk. Gold gapped lower and the dollar gapped up at the open but we are seeing these moves retracing a bit as the European session gets underway.

G20 meetings kick off in Bali this week with lots for financial markets to ponder. What does Russia do, and what do China and India say about their mate Putin? Inflation, energy markets and climate change are also likely on the agenda; as might be crypto regulation.

Crypto

On crypto, FTX has gone and is taking many with it. It looks like many investors have money stranded on the exchange. Turns out playing with unregulated Ponzi schemes is not such a great idea after all… Bitcoin has come off its lows made last week but is still below $17k, down around 20% over the last week, with ether in a similar position. Crypto winter is turning into an ice age. As Warren Buffett said, Bitcoin is a “delusion” that “attracts charlatans”. FTX is by far and away not the only bad apple here.

In FX, the dollar has been offered following the softer-than-expected inflation data on Thursday. GBPUSD has continued its rise above the 100-day line to 1.18 where it’s wrestling with the 38.2% retracement of the decline between May 2021 and September 2022. Cable had risen to 1.1850 on Friday night before gapping lower at the Sunday open. But the move seems to be retracing and we can maybe look to retest last week’s highs. EURUSD showing similar ascendancy but both pulling back a touch from Friday evening’s highs.