By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Sentiment steadied yesterday with stocks rebounding, amid subdued trade elsewhere, with the central bank bonanza proceeding largely as expected. Today, UK retail sales highlights the docket.
WHERE WE STAND – Ladies and gents, we have finally made it to the end of the year!
In terms of yesterday’s trade, it was a decidedly risk-on day, with participants putting jitters over AI valuations to one side, allowing dip buyers to emerge once more, and the ‘Santa Rally’ to potentially get underway. The tech sector led equity upside on the day, though both spoos & the NQ bounced solidly off their 100-day moving averages, while the pan-European Stoxx 600 notched a new record high.
I’ve been an equity bull since May, and remain one now – the fundamental case for further upside is still solid, with earnings growth robust, the economy resilient, the monetary backdrop growing looser, and a calmer tone continuing to prevail on the trade front. Chuck in seasonal tailwinds, and the ‘path of least resistance’ should continue to lead higher, and dips should continue to present themselves as buying opportunities.
On the monetary front, the central bank bonanza of the last 24 hours proceeded almost exactly as expected. The ECB, Riksbank, and Norges Bank all stood pat, while the BoE delivered a 25bp cut, the first since summer, albeit via a narrow 5-4 vote split, with the MPC in turn flagging that further cuts will become a ‘closer call’ as Bank Rate nears its neutral level. Any boost that this hawkish rhetoric provided to the quid was fleeting, at best. Overnight, the Bank of Japan duly delivered the 25bp hike that money markets had fully discounted, raising the policy rate to a 30-year high 0.75%, while also flagging the likelihood of further hikes in the future, if the economic outlook is realised. It would also be remiss of me if I forgot to mention that not only was my doppelganger present at the ECB press conference yesterday, but he even got given the chance to ask a question!!
Meanwhile, yesterday’s US inflation figures were rather too noisy to be worth paying attention to. Headline CPI rose 2.7% YoY in September, a long way shy of the 3.1% YoY consensus, while core prices rose 2.6% YoY, also shy of the 3.0% YoY consensus. However, given the government shutdown meant that no October data was collected, and that the November data was likely collected around the Black Friday/Cyber Monday discounting period, I’d certainly not be placing too much weight on the data. The FOMC will probably do similar, though the reaction function leans almost entirely towards supporting the labour market at this point anyway.
Given those data quality concerns, it was a little surprising to see Treasuries rally across the curve in reaction, though I guess in these thin festive trading conditions, we really shouldn’t be reading too much into any market moves right now, and I certainly don’t plan to over-extrapolate yesterday’s price action, not least considering the huge supply that we’ve got coming down the track next year.
Interestingly, CPI had little sustained impact on the precious metals complex ,where we saw yet another day of gains across the board, nor the FX space, where most G10s just trod water for the entire day, in another very turgid session indeed.
LOOK AHEAD – Today’s running order: UK public borrowing, UK retail sales, followed by Canadian retail sales, and UMich sentiment figures.
Then, ‘every man and his dog’ will be seeking to get off the desk as quickly as possible, and get the Christmas festivities underway (if they haven’t snuck off early!).