Why the wild swing in the stock market?
Expect the squeeze to continue
During the European trading session, news that the UK government is considering scrapping the fiscally profligate tax cuts boosted risk sentiment and caused the US stock futures to rise almost 1% before US-based traders are even fully awake. This would have caused some bears to trim their positions.
However, the US CPI data showed that headline inflation rose 8.2% year-on-year, a touch higher than the 8.1% that the market expected and prices excluding the more volatile components of energy and food prices rose 6.6% (vs 6.5% expected). This panicked the market as it gives the US Federal Reserve strong reasons to continue hiking aggressively.
As expected, the knee jerk reaction was to sell risk assets as the US 2-year bond yield spiked more than 0.20% as market priced for a certain 0.75% hike in the Nov Fed meeting, and a 16% chance that the Fed may hike a whopping 1.00%!
The S&P 500 stock index sold off 4% from the day’s high at that point, to be down 3% on the day in seconds. Bearish investors were now seduced into selling at bad levels as selling after bad inflation data has been working for months. So why not join the bandwagon yet again?
However, something odd was clearly happening because while the stock index sold off aggressively, the VIX, a measure of US stock volatility which is usually a barometer of fear, was dropping instead of spiking higher as would be expected during bouts of panic selling.
Within minutes, the S&P 500 started recovering and the bounce over the course of the session amounted to a 5.6% turnaround from the lows!
This crazy swing caught many speculators who sold in reaction to the hotter-than-expected inflation data wrongfooted. The bounce from the lows were not triggered by any particular piece of news. The market was just short, and more sold into the hole, and soon had to scramble to cover their positions as the market refused to go any lower.
With the bears now caught at bad levels, expect the squeeze to continue unless we get new data to drive the market to new lows.
Trading Tip
Remember the Process
Sometimes we find ourselves becoming lax in the way we approach our trades. This could be because we are getting too complacent as we become more “proficient” with the markets. Nevertheless, becoming too lax in our trading will eventually work against our profitability.
Being disciplined in trading is imperative as it is something that we can fall back on once things do not make sense in the markets (in fact, that is really common.) It allows us to exit our trades at appropriate levels and ensure that we do not get carried away by our emotions by the seemingly “irrational moves” of markets.
Day Ahead
US Retail Sales for September is expected to reflect a 8% increase in Sales Year-on-Year, down from 9.1% in August. University of Michigan (UoM) Preliminary Consumer Sentiment for October is expected to reflect an increase in sentiment to 59 from 58.6 previously. UoM inflation expectations for the year ahead is expected to stay the same at 4.7%.
Trading Plan
1. Currencies:
EUR - Short the EUR. Stay short.
2. Commodities:
Uranium & Energy - Stay invested
3. Stocks:
US Stock Index: Stocks traded in a wild range with the S&P500 down nearly 3% on the day in the immediate aftermath of the hotter-than-expected inflation data, but ending the day up +2.6%, a swing of 5.6% off the lows. Expect the weak shorts to continue to be pressured.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: Comments from US Federal Reserve officials on their thoughts about future interest rate hikes will influence risk sentiment. 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
US Consumer Price Index (CPI) showed that prices for a specified basket of goods rose +8.2% (vs 8.1% expected) Year-on-Year. The data shows that although headline inflation is coming off the highs, it is not dropping as fast as the market hopes/expects . The core index (which excludes energy and food prices) overshot expectations of 6.5% slightly, with a print of 6.6% Year-on-Year, rising to the highest level in 40 years. The unexpectedly high inflation was driven mostly by surprisingly strong price rises in the service and rental sector.
Initial Jobless Claims for the week ending on 8 Oct continues to reflect a worsening labour market with 228K new claims (vs 225k expected), increasing from the previous week’s print of 219k.
The US Treasury yield curve remains inverted with the difference between the 2-year and 10-year bond yields now at 0.50%. The 2yr saw a spike of +0.19% as CPI continued to beat expectations. The 10yr treasury yields rose +0.06%.
The US stock market opened lower following the hotter than expected inflation report but reversed course and bounced higher as the day went by. The S&P 500 leapt +2.60% (intraday high: +3.03%, intraday low: -2.39%), the Dow Jones spiked +2.83% (intraday high: +3.28%, intraday low: -1.86%) while the Nasdaq rose +2.30% (intraday high: +2.80%, intraday low: -3.19%).
US Stock market futures had a volatile day due to the developments through the day. The S&P 500 futures rallied +0.94% after reports that the UK government may reverse parts of its tax-cutting proposals hit the wires. However, it then collapsed -2.84% following the release of the US CPI data. The S&P 500 futures then gradually climbed higher after the CPI data, allowing it to close +2.42% higher on the day.
The crypto market fell heavily following the US CPI but tracked the US stock market higher after the release of the data point. Bitcoin closed higher by +1.2% (intraday high: +1.77%, intraday low: -4.95%) while Ether dipped -0.6% (intraday high: +0.40%, intraday low: -7.57%).
Headlines & Market Impact
Posh ice cream, craft beer in vogue as Chinese downsize their love of luxury
Notable Snippet: The shift in consumer trends, one that has seen some segments of the population go ultra-frugal, comes amid much economic gloom.
The country's COVID-zero policy and its resulting frequent lockdowns have put the brakes on business activity and normal outlets for spending such as tourism. The property sector is also in crisis while the tech and private tutoring industries have sharply reined in hiring after regulatory crackdowns, contributing to a spike in youth unemployment.
The economy narrowly escaped contraction in the second quarter and retail sales grew a measly 0.5% in January to August from the same period a year earlier, a far cry from growth of around 8% to 9% seen in recent years.
"Before, let's say with a handbag or cosmetics, if I liked it I would just buy it without a second thought, now I really double check with myself if I need something before I buy it."
What we think: We should see a similar trend emerge around the world as well as the world goes through a time of high inflation and economic turmoil.
Treasury’s Yellen says Russia’s war has weakened its economy ‘for years to come’
Notable Snippet: Treasury Secretary Janet Yellen says Russia’s war against Ukraine has weakened its economy and slowed the nation’s growth prospects for the foreseeable future.
“The Russian economy is projected to contract this year and the next,” Yellen said Thursday before a meeting with European economic officials at the International Monetary Fund and the World Bank annual meeting in Washington, D.C.
Historic sanctions imposed by the U.S., the European Union and allies against Russia for its unprovoked invasion of Ukraine have cut the nation off from Western capital markets with the larger goal of depriving Russian President Vladimir Putin of the revenue he needs to finance the war, Yellen said.
“Lost investment, including hundreds of private sector companies that have left the country and are unlikely to return, and constraints on Russia’s real economy will create a drag on Russia’s growth prospects for years to come,” she said in remarks released by the department.
What we think: The Russian war is indicative of how dreadful economic sanctions are on an economy. It should serve a warning to China and make them think twice before going to war with Taiwan.
Xi wanted China to be at the tech frontier. 5 years on, tensions with the U.S. have dented that goal
Notable Snippet: Five years since Xi’s address at the Communist Party of China’s last National Congress, the global reality for the world’s second-largest economy has transformed. It comes amid an ongoing trade war with the U.S., challenges from Covid and a change in political direction at home that have hurt some of Beijing’s goals.
On Sunday, the 20th National Congress — held once every five years — will begin in Beijing. The high-level meeting is expected to pave the way for Xi to carry on as head of the Communist Party for an unprecedented third five-year term.
Xi will take stock of China’s achievements in science and technology, which have yielded mixed results.
He said China sets “lofty” goals as it targets to be the best, but “they are limited politically and ideologically in terms of the strategies to reach them.”
Private tech enterprises are faltering under stricter regulation and a slowing economy. China is far from self-sufficient in semiconductors, a task made harder by recent U.S. export controls. Censorship on the mainland has tightened as well.
What we think: Whatever Xi says this Sunday will be of utmost importance as China attempts to figure out a way to achieve its goal despite the US imposed sanctions.
Sentiment
FX
Stock Indices
Best,
Phan Vee Leung
CIO & Founder, TrackRecord