Calendar Week 44-2022

 

Last week was a pivotal week by my reading. A number of trends were broken, and it seems the market is pricing in the end of rate rises. They could well be wrong and the week ahead will also be pivotal with the FOMC meeting mid-week. Time will tell.

 

VIX, the fear indicator, fell significantly last week as protection from downside moves were dumped in favour of protection against a big upswing in stocks. At this time of the year, this expectation is normal, with the “Christmas” rally usually starting in October. What is unusual about it is that the market is roaring in the face of higher rates and inflation. Even the dismal US earnings season (tap-tap Meta) failed to diminish the fear and there is much FOMO I see in the move.

 

Over in bond land, the picture is different. Whilst bonds finished the week higher, they are still in a bear market and it does not look like it is ending anytime soon. US 10 years closed the week at 4.01% but it would have to be back under 3.5% to consider it a bull market again. And going under 3.5% won’t happen with the Fed still being hawkish and 75bps increase this week all but a forgone conclusion.

 

So who is right? Stocks or bonds. I think both are right now and that is why I think we are at a pivot point. I think we will see higher rates and a Christmas rally in stocks, but then in February we will see another stock market correction.

 

Commodities this week were choppy but Friday saw some big drops in gas, iron ore, coal and copper – all of Australia’s largest export markets. But copper is an indication of growth and often linked to recession or expansion. Seeing it drop supports the idea that stocks are wrong and the coming recession will bite hard.

 

The biggest trend change has been the EURUSD and by connection, the US Dollar Index. Markets can often re-engage with the previous trend but this week saw the first Higher High by the EURUSD since December 2020. This was preceded by a Higher Low earlier in the month and that is the definition of an uptrend, Higher Highs and Higher Lows. So this is significant. Not that we have a reason to be bullish Euro, but it is more about the selling in the USD, as funds exited the safe haven and dove into stocks.

 

Currency Guidance

 

USD – Technically we are now in a downtrend. With FOMC this week though I would be cautious about becoming full bear on it. Fundamentally the picture is more upside still but maybe not too much more. So there is the differing opinions between fundamental and technical analysis. Not something I like to trade.

 

AUD – Technically this failed at key resistance of 0.6530 and rolled over. Fundamentally I am happy to fade this too. I expect the Aussie to trade 0.60 in coming weeks, maybe even before Christmas.

 

EUR – Now we have seen the Higher High, I am looking for a little pullback into the 0.9865 area and if we get a bounce there, happy to be buying the next run up.

 

GBP – Had a good week, in fact closed on or near the highs against all its peers. Seems the market is liking the new PM. Still got a lot of work to do with inflation well over 10% but I cannot deny the price action. Have to wait for some selling before I can jump on the “buy British” bandwagon as it has gone too far too fast for my liking.

 

JPY – Kuroda doubled down on dovishness when he said on Friday he will not use rates to slow the currency fall, and yen got spanked because of it. If you are looking to trade yen, against the Euro looks the most attractive right now.