Signs of abating aggression
Should inflation data start to moderate and stop surprising to the upside, expect this abating aggression to be reflected in US Federal Reserve officials as well.
The Bank of Canada, one of the most aggressive major central banks in raising interest rates, unexpectedly showed some restraint yesterday when it hiked by just 0.50% instead of the widely expected 0.75% increment. Policy rates in Canada have tracked US interest rates higher since March.
This unexpected moderation in the Bank of Canada’s aggression is a sign that large interest rate hikes are starting to grow less necessary as the policymakers are now starting to see the impact of previous hikes in the economy and are now more open to being more patient to allow for the lagged effects to filter through.
Should inflation data start to moderate and stop surprising to the upside, expect this abating aggression to be reflected in US Federal Reserve officials as well.
Trading Tip
Taking Profits is Difficult Too
We always stress the importance of having trade exits before entering your trades, with an emphasis on having a stop loss to minimise trade losses. However, taking profits may actually prove to be as difficult or maybe even more so.
Some of us have a tendency for closing trades when they are in the green despite only a small profit. As a result, we end up risking too much for too little. On the other hand, once the trade is deep in our favour, we will start to overstay as the inertia to get out of the trade becomes higher and higher as we fear missing out on more profits.
For those who tend to take profits too early, it is imperative to try to stick to your initial targets unless the reasons for the trade changes substantially from your initial assessment as you do not want to end up with much worse risk vs reward ratios than you intended in the first place.
For those who tend to overstay their welcome, profits should be taken when the profits start to constitute a large percentage of your portfolio. This will reduce the likelihood of significant drawdowns when something goes wrong with the position.
Day Ahead
The European Central Bank is expected to raise interest rates by 0.75% to 2.00%. Expect ECB President Lagarde to continue to talk tough about inflation.
Trading Plan
1. Currencies:
EUR - Short the EUR. USD continues to retrace from the highs. Next resistance level is at 1.0210-20. Remain short.
2. Commodities:
Uranium & Energy - Stay invested.
3. Stocks:
US Stock Index: Weak earnings reports from the tech giants weighed on the market. Expect trading to remain volatile while the market awaits more clarity on the inflation front.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: The US Federal Reserve is now in its media blackout period ahead of its November 3 meeting. The Ukraine-Russia war rages on, and though the market impact is limited, the energy shortage situation could worsen if tensions should escalate.
What Happened Yesterday
The Bank of Canada raised interest rates by only +0.50% (vs +0.75% expected), surprising markets. The smaller hike was said to be due to slower projected GDP growth for next year and that higher interest rates are already showing its effects on interest rate-sensitive areas like housing. The Canadian 2-yr yield fell -0.28% as a result.
The US Treasury yield curve remains inverted with the difference between the 2-year and 10-year bond yields now at 0.35%. The 2yr yield fell -0.03% while the 10yr treasury yield declined -0.06% to 4.10%.
The US stock market was bogged down by tech earnings released during after market hours on Tuesday. The S&P 500 fell -0.74% (intraday high: +0.70%, intraday low: -0.91%), the Dow Jones inched higher by +0.01% (intraday high: +1.05%, intraday low: -0.31%) while the Nasdaq plummeted -2.26% (intraday high: -0.12%, intraday low: -2.41%). Stocks did try to narrow the losses, spiking to intraday highs, when the BoC hiked by only 0.50% because the market viewed it as yet another possible sign that the US Federal Reserve will soon start to exercise some restraint on their interest rate hikes as well. However, the recovery waned as the trading session wore on, with the spectre of Alphabet’s (GOOGL) and Microsoft’s (MSFT) weak earnings reports from the previous day weighing on the market sentiment.
Meta missed on its earnings ($1.64 vs $1.89 expected) resulting in a -19% fall in its stock price in after market trading. Losses were attributed to the underperformance in Reality Labs (Meta’s virtual reality division), reduced ad spending and challenges from Tiktok.
The crypto market remained resilient in the face of poor tech earnings. The outperformance could be due to Musk's acquisition of Twitter which sparked a 16% gain in Dogecoin. Bitcoin and Ether leapt +3.4% and +7.3% respectively.
Headlines & Market Impact
Powell again is facing political pressure as worries mount over the economy
Notable Snippet: “It is your job to combat inflation, but at the same time you must not lose sight of your responsibility to ensure that we have full employment,” Brown wrote. He added that “potential job losses brought about by monetary over-tightening will only worsen these matters for the working class.”
Without recommending a specific course of action, Brown asked Powell to remember the Fed has a two-pronged mandate — low inflation as well as full employment — and requested that “the decisions you make at the next FOMC meeting reflect your commitment to the dual mandate.”
“Chair Powell has made it pretty clear that the necessary conditions for the Fed to achieve its full employment objective is low and stable inflation. Without low and stable inflation, there’s no way to achieve full employment,” said Mark Zandi, chief economist for Moody’s Analytics. “He’ll stick to his guns on this. I don’t see this as having any material impact on decision making at the Fed.”
What we think: Fed Chair Powell has been quite adamant that the effort to tame inflation will exact a toll on the economy in the short term, but it will lead to more long term economic growth if inflation is not allowed to persist as that will risk inflation expectations becoming entrenched.
Meta stock craters over bleak forecast and expensive metaverse bets
Notable Snippet: Facebook parent Meta Platforms Inc (META.O) on Wednesday forecast a weak holiday quarter and significantly more costs next year, sending shares down nearly 20% as investors voiced skepticism about the company's pricey metaverse bets.
The forecast knocked about $67 billion off Meta's stock market value in extended trade, adding to the more than half a trillion dollars in value already lost this year.
The disappointing outlook comes as Meta is contending with slowing global economic growth, competition from TikTok, privacy changes from Apple (AAPL.O), concerns about massive spending on the metaverse and the ever-present threat of regulation.
What we think: The outlook for Meta does not seem good as Zuckerberg continues to stick to his metaverse guns. Investors continue to lose confidence in his vision as traction among the masses remain a dream for now.
Analysis: Need for speed: China Xi's new generals offer cohesion over possible Taiwan plans
Notable Snippet: Chinese President Xi Jinping's new generals may have been selected for their political loyalty to him, but those ties could serve at least one vital military purpose in any Taiwan invasion plan: ensuring cohesion and decisiveness.
Although the Politburo's seven-man Standing Committee would make the ultimate decision on any Taiwan action, the Central Military Commission would forge and execute the battle plan, eight Asian and Western military attaches say.
"This breaking of precedent is being used to his advantage to achieve two aims at once," said James Char, a military scholar at Singapore's S. Rajaratnam School of International Studies, referring to keeping Zhang in his post past retirement. "To ensure the PLA's top soldier is someone well-versed in operational command and is politically reliable."
What we think: The situation over Taiwan remains a huge risk in the geopolitical landscape.
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Best,
Phan Vee Leung
CIO & Founder, TrackRecord