The Fed’s comments are consistent…
Do not be too spooked by their projections
As we have been stressing of late, the US Federal Reserve officials’ comments on inflation and the path of its future policy moves will likely remain hawkish even as they start to slow the pace of their interest rate hikes. This is because they do not want to trigger too much optimism in the markets that they will stop hiking interest rates any time soon.
Their forward guidance for the next meeting will be important but beyond that, their opinions are subject to how inflation and job data evolves as time passes. As such, do not be too spooked by their projections about what they’re going to do next year. They will keep talking tough on inflation because they know how easily the market will overreact if they start to talk less aggressively about inflation.
Trading Tip
Hang in There
There will be times when we feel discouraged as our trades start to falter and the macro trajectory that we had in our minds fail to pan out. As a result, we may be forced to take losses that sometimes seem unbearable.
However, we just have to plough through and understand that it is part of our trading journey and it’s impossible to be correct all the time. Just take the losses, reassess the trades and figure out what went wrong. Also, do not force yourself to get into trades in order to make up for the losses. Instead wait till you are mentally ready before getting back into the game.
Day Ahead
Nothing noteworthy on the horizon.
Trading Plan
1. Currencies:
EUR - Short the EUR. Resistance at 1.0490-1.0500 held, and EUR is drifting lower again. Stay short and patient for now.
2. Commodities:
Uranium & Energy - Stay patient and stay invested.
3. Stocks:
US Stock Index: Stocks traded lower due to hawkish comments from Federal Reserve officials. Expect it to remain in recent range until we get more data on the inflation and jobs market fronts.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: US Federal Reserve policymakers’ comments on the path of policy moves going forward will influence risk sentiment.
What Happened Yesterday
Fedspeak:
Bullard (current voter, known hawk): On pace of hikes, I defer to chair Powell, it doesn't matter that much in macro terms how quickly we get to the right level.
Mester (current voter, known hawk): It’s very easy to be caught out by the good news, but we don’t want wishful thinking to take the place of really compelling evidence, costs of stopping too early would be too high.
Barkin (voter in 2024, known hawk): I'm very supportive of the path that is slower, probably longer and potentially higher.
Brainard (current voter, known dove): The successive shocks to global supply chains from the pandemic and the war in Ukraine could ‘herald a shift’ to an era of more volatile inflation and force central banks to guard against it with tighter monetary policy.
Williams (current voter, known slight hawk): I do think we're going to need to keep restrictive policy in place for some time; I would expect that to continue through at least next year.
The US Treasury yield curve remains inverted with the difference between the 2-year and 10-year bond yields now at 0.77%. The 2yr yield rose +0.04% while the 10yr yield inched higher by +0.01%.
The US stock futures market started the week lower as risk of supply chain disruptions due to protests in China dented risk sentiment (S&P 500 futures low: 3992.25; -1.04%). However, by the time the US cash stock market trading hours started, the stock indices had already fought their way back to flat. As the hawkish comments of various Fed officials hit the newswires, selling pressure intensified and pushed the indices lower again. The S&P 500 slid -1.55% on the day (intraday high: -0.34%, intraday low: -1.75%), the Dow Jones fell -1.45% (intraday high: -0.13%, intraday low: -1.59%) while the Nasdaq slipped -1.43% (intraday high: +0.07%, intraday low: -1.71%).
The crypto market traded lower as BlockFi, a crypto lender, filed for bankruptcy protection on Monday. Bitcoin fell -1.9% (intraday low: -2.5%) while Ether fell -2.2% (intraday low: -3.5%).
Headlines & Market Impact
ECB's Lagarde says inflation hasn't peaked, may surprise
Notable Snippet: Euro zone inflation has not peaked and it risks turning out even higher than currently expected, European Central Bank President Christine Lagarde said on Monday, hinting at a series of interest rate hikes ahead.
Her comments, along with remarks by Dutch central bank chief Klaas Knot earlier, were likely to dampen speculation that the ECB was about to take a gentler path with future rate increases.
"We do not see the components or the direction that would lead me to believe that we've reached peak inflation and that it's going to decline in short order," Lagarde told the European Parliament.
She added that ECB economists still saw clear "upside" risks - financial jargon for the risk that inflation readings could come in higher than expected.
Economists polled by Reuters see euro zone inflation at 8.5% this year, 6.0% next year and 2.3% in 2024 before finally hitting the ECB's 2% target in 2025.
What we think: Inflation will continue to weigh on the Euro area. The Eurozone economy will continue to be plagued by inflation and the high energy prices in the weeks ahead.
The yuan's the new dollar as Russia rides to the redback
Notable Snippet: While the yuan, or renminbi, has been making gradual inroads into Russia for years, the crawl has turned into a sprint in the past nine months as the currency has swept into the country's markets and trade flows, according to a Reuters review of data and interviews with 10 business and finance players.
Russia's financial shift eastwards could boost cross-border commerce, present a growing economic counterweight to the dollar and limit Western efforts to pressure Moscow by economic means.
Total transactions in the yuan-rouble pair on the Moscow Exchange ballooned to an average of almost 9 billion yuan ($1.25 billion) a day last month, exchange data analysed by Reuters showed. Previously, they rarely exceeded 1 billion yuan in an entire week.
To put this in a global context, though, the dollar and euro are still by far the dominant currencies, representing more than 42% and 35% of flows respectively as of September this year. The yuan has risen to almost 2.5% from below 2% two years earlier.
What we think: Russia’s exposure to the yuan may spell increased adoption of using yuan as a currency of exchange among other countries in the central Asia region and possibly the Middle East.
Crypto firm BlockFi files for bankruptcy as FTX fallout spreads
Notable Snippet: Distressed crypto firm BlockFi has filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of New Jersey following the implosion of putative acquirer FTX.
In the filing, the company indicated that it had more than 100,000 creditors, with liabilities and assets ranging from $1 billion to $10 billion.
BlockFi’s bankruptcy filing shows that the company’s largest disclosed client has a balance of nearly $28 million.
BlockFi — which was last valued at $4.8 billion, according to PitchBook — is among many crypto firms feeling the pressure of FTX’s collapse. In July, FTX swooped in to help BlockFi stave off bankruptcy by extending a $400 million revolving credit facility and offering to potentially buy the beleaguered lender.
What we think: The contagion effect of the FTX fallout continues, get your cryptos out of centralised institutions if you have not already done so.
Sentiment
FX
Stock Indices
Best,
Phan Vee Leung
CIO & Founder, TrackRecord