By Michael Brown Senior Research Strategist at Pepperstone
DIGEST – A ‘day of two halves’ on Friday as shaky sentiment eventually gave way to dip buying in the equity space, on renewed hopes of an end to the US government shutdown. This week, an incredibly light data docket awaits.
WHERE WE STAND – I guess it was, in a way, fitting, that we had a hectic and slightly chaotic Friday, to round out what had been a hectic and chaotic week.
Chatting with other market participants, though, I’m pleased to report that I’m not alone in thinking that last week was both messy, but also a bit of a headscratcher, with nobody seemingly able to identify an especially clear or obvious catalyst for the risk aversion that’s suddenly swept over proceedings.
The best explanation I can offer is that, with stocks up ~40% from the bottom in April, having essentially rallied in a straight line over that period, ‘Mr Market’ is simply suffering from a bout of exhaustion, which is in turn compounded by a lack of desire among market participants to chase moves too much, or worse ‘catch falling knives’, with us being so close to the end of the year. There’s just 6 ‘proper’ trading weeks to go, though I’d wager that many participants are really looking at Thanksgiving as the time when they’ll begin to shut up shop for 2025.
Anyway, back to Friday, which I can best summarise as a ‘day of two halves’, with sentiment proving very shaky indeed for the most part, before risk assets enjoyed a strong intraday bounce, seeing stocks on Wall Street end the day as near as makes no difference where they started it.
As mentioned, proceedings started in decidedly risk-averse fashion, with the tech sector again leading the downside, in a move that saw spoos briefly dip beneath the 50-day moving average, a level that we’ve not closed below since all the way back in April. Still, dip buyers did eventually emerge, on the back of reports that the Democrats had put forward a proposal to re-open the federal government, incorporating a 1-year extension of the current ‘Obamacare’ tax credits into a new government funding deal. While that proposal didn’t exactly cut the mustard with Senate GOP leadership, it does at least show that the 2 sides involved in this dispute are finally talking, hence represents a small glimmer of light at the end of the tunnel. My working assumption is still that the shutdown will end by Thanksgiving, at the latest, especially after further progress towards a fresh bipartisan deal over the weekend, and with a key procedural vote obtaining the required 60 Senators being in favour.
My other assumption is that the path of least resistance for risk assets continues to lead to the upside, with the fundamental bull case still a solid one, and dip buyers continuing to lurk. Holding north of the aforementioned 50-day MA will be key, though, as a closing break below that level would give the upper hand to the bears, in the short-term at least.
Meanwhile, that ‘day of two halves’ theme sums up broader market action as the week drew to a close, with the dollar softer for the most part before reversing course a touch, Treasuries attracting haven demand before paring gains, and gold also trading in relatively choppy fashion though managing to remain north of the $4,000/oz mark.
That choppiness was exacerbated by a near record-low UMich consumer sentiment print, at 50.3 per the prelim. November reading, with participants attaching greater weight than usual to the data, in the continued absence of official government releases. I would caution, though, that with a sample size amounting to the statistical equivalent of ‘one man and his dog’, and with the survey remaining severely skewed depending on the respondents’ political allegiances, the predictive power of the UMich number, in terms of future consumption & spending, is rather limited in my mind. That said, combining the UMich survey with the rather grim Challenger layoffs data that we had on Thursday does seem to have led to the ‘US exceptionalism’ idea being thrown into doubt, with both of those prints having resulted in the buck’s recent rally rather stalling out. For now, at least, it seems that the market would rather not take the DXY back above the 200-day MA, at 100.25, with spot having been continuously beneath that mythical yellow line since back in March.
Besides that UMich data, and WH Adviser Hassett sounding rather pessimistic about the shutdown-induced hit to GDP that we’ll see this quarter, Friday’s only other notable fundamental development came in the form of last month’s Canadian jobs data.
While the Canadian economy added a huge 66.6k jobs in October, all of this came from part-time employment, with full-time employment actually falling by 18k on the month, even as the unemployment rate fell 0.2pp to 6.9%. While this data was enough to send USD/CAD back beneath the 1.41 figure, and see the loonie snap a 6-day losing run, it doesn’t change much for the BoC, who firmly indicated last week that the easing cycle is now at an end, barring any downside surprises.
LOOK AHEAD – If you were looking to take a week off desk, before the holiday period, this wouldn’t be a bad one to disappear for, given the dearth of events on the docket, though clearly I’ve not followed my own advice on that front!
I’m not sure I remember a week ahead calendar with less on it than we have this week, though the US government shutdown clearly isn’t helping matters on that front, with the October CPI, PPI, and retail sales reports that were all due this week having been postponed, and in fact there being some doubt as to whether we will actually ever see that data at all.
In terms of the data we will get, the latest UK employment & GDP figures will be worth a look, with headline unemployment set to have risen to 4.9% in the three months to September, as labour market slack continues to emerge. Meanwhile, the economy is expected to have grown by 0.2% QoQ in third quarter, though risks clearly continue to tilt to the downside ahead of what are likely to be significant tax hikes announced in the Budget later this month.
Besides that, jobs data from Australia, and a few Chinese releases are all that the calendar serves up this week for the macro-focused folk, though there will be plenty of Fed, and other, central bank speakers making remarks throughout the days to come, even if there is likely to be relatively little by way of concrete guidance issued by any of them.
Elsewhere, a sizeable week of Treasury supply awaits, kicked-off by a 3-year sale today ahead of a market closure for Veterans Day tomorrow, while earnings season rumbles on, albeit with most of the major names having now reported for Q3, but with this week’s notable reports including the likes of Cisco (CSCO) and Disney (DIS).