Weekly Note 2022.10.03

UPtober?

Focusing solely on US equity markets for this week’s note

A torrid week, month, and quarter…

This time last week, I expressed a tactically bullish view in my note and how quickly my views can change!! Started the week trading the pro-risk side but that didn’t last long as I wasn’t convinced about a Turnaround Tuesday materialising based on the action on bonds I was observing ahead of NY open on Tuesday …

Wednesday into the close produced what turned out to be a good entry signal …

Meanwhile, there was a good number of peers I engage with maintaining a bullish stance on the back of the BoE backstop in the Gilts market which triggered some short-covering in bond markets …

I remained suspicious …

Not only did European inflation come in hot, US Core PCE also beat expectations returning to a re-accelerating trend on m/m basis (as well as the continued decline in jobless claims the day earlier) …

There really wasn’t any good reason, in my view, to get bullish …

Going forward …

I think we are on course for another (potentially deep) flush lower and I plan to stay short and flip long in the early hours of Tuesday. It’s also NFP week and the expectation for a decent jobs report should provide some support for bounce.

I’ve added to my Nasdaq shorts this morning and also initiated a GBPUSD short as the positioning washout last week should clear the path for Cable to follow equities lower. I’m eyeing this GBPAUD idea also for when the market pivots:

Looking at the NDX chart, 10,710–10,590 area is my area of interest for the bullish pivot, and would not rule out 10,400 and 10,100 as extended downside targets given the bearish weekly cliffhanger print last week:

Finally, while October is well known for its’ strong seasonality, I was interested to take a look from differing perspectives:

10year Median returns trending above the Mean points to a very bullish skew …

Yom Kippur starts Tuesday evening, ends Wednesday evening, interestingly shows the more recent 10yr seasonal averages trending more positively than their longer 50yr averages …

and ‘Uptober’ still true to its name during mid-term years since 1958.

That’s it for this week — have a good week trading!

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NEWS HEADLINES

US

  • Fed’s preferred gauge shows inflation accelerated even more than expected in August — Core inflation rose 0.6% m/m, Personal income rose 0.3% — same as July and in line with the estimate, Spending rose 0.4% after declining 0.2% the month before (CNBC). Jobless claims hit five-month low despite Fed’s efforts to slow labor market — Initial filings for unemployment claims fell to their lowest level in five months last week to 193,000 below the estimate of 215,000 (CNBC). Fed’s Lael Brainard Warns on Financial Stability Risks — vice chairwoman said the central bank was attentive to financial tremors that could result from aggressive rate rises across the globe but said it wouldn’t pull back prematurely on its efforts to beat high inflation (WSJ). Fed Must Press On Despite Global Market Volatility, Evans Says (BBG).
  • 10-year yield rises above 3.8% after topping 4% briefly this week (CNBC). Fed Rate Hikes Are Pushing Credit Market Toward Dysfunction, Bank of America Says — Credit stress is nearing ‘critical zone,’ strategists say, Fed needs to slow down hikes or face difficult fixes, they say (BBG). Fed Reverse Repo Use Hits Fresh Record as Investors Hide in Cash — Usage of key tool increased to $2.367 trillion on Wednesday, Volatility roiling markets is pushing traders to the short end (BBG). Inflation Keeps the U.S. From Stepping In to Slow Dollar’s Rapid Rise (WSJ).
  • After Punishing Year for Stocks, Investors Aren’t Betting on Post-Midterm Rally — A tough market has investors wondering whether 2022 will dent an 80-year record of notching gains after midterm elections (WSJ). Stanley Druckenmiller sees ‘hard landing’ in 2023 with a possible deeper recession than many expect — “I will be stunned if we don’t have recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so called average garden variety” (CNBC). The bear market may not be over but some corporate insiders are acting like it is (MarketWatch).

EUROPE

  • UK pensions hit with £100m margin calls as gilts and sterling slide — At least three LDI managers request emergency capital as others consider unwinds to avoid default (Risk.net). Bank of England intervenes in bond market after historic sell-off — U.K. gilt yields were on course for their sharpest monthly rise since at least 1957 as investors fled British fixed income markets following the new fiscal policy announcements (CNBC). Bank of England says it won’t hesitate to hike rates after pound falls to historic low (CNBC).
  • Larry Summers blasts UK tax cuts as ‘utterly irresponsible’ and warns of possible contagion (CNBC). Ray Dalio Says UK Operating ‘Like An Emerging Country,’ Spending Plan ‘Suggests Incompetence’ (BusinessInsider). UK already in a full-year recession as Europe faces tough winter, S&P Global says (CNBC). UK Prime Minister Liz Truss Admits Mistake in Communicating Economic Plan — The Conservative Party leader’s comments came after S&P lowered its outlook on U.K. debt (WSJ). Truss Says It Was Kwarteng Who Decided to Cut UK’s Top Tax Rate — Tory anger builds, MPs including Gove say they won’t back it, Poll shows majority think Truss has lost control of economy (BBG). Kwarteng Trying to Head Off Tory Rebellion Over Tax Cut Debacle — Kwasi Kwarteng is privately trying to reassure Conservative Members of Parliament that his tax cuts can fix the UK economy, in a bid to head off a potential rebellion (BBG).
  • Euro zone inflation soars to a record 10%, piling pressure on the European Central Bank — The reading also showed price increases broadening out from volatile food and energy prices into nearly all segments of the 19-member bloc’s economy (CNBC). German €200bn energy support plan sparks ‘animosity’ within EU — Germany’s pursuit of a massive borrowing package to help its economy withstand the energy crisis has heightened tensions among EU member states as they struggled to forge a common approach on lowering gas and electricity prices at meetings in Brussels (FT).
  • Vladimir Putin unleashes a new phase of war Russia’s illegal annexation of four Ukrainian regions cannot be allowed to stand (FT). Ukraine claims full control of key logistics hub, eyes further gains — Control over Lyman could prove a “key factor” in helping Ukraine reclaim lost territory in the neighboring Luhansk region (CNBC). As Russian Troops Flee Lyman, Ukrainians Rejoice — and Help Themselves to Russian Supplies — Ambushed during the hasty retreat, Moscow’s forces leave behind burning vehicles and bodies of soldiers along the roadsides (WSJ). The U.S. and Europe are running out of weapons to send to Ukraine (CNBC). Desperate Russians fleeing Putin’s war draft stream into Kazakhstan — Some 100,000 people and counting have sought refuge in the former Soviet republic to avoid conscription (FT).
  • Russia’s Gazprom Suspends Gas Flow to Italy — Italy, which has largely diversified its gas supply away from Russia, could be latest EU country to be cut off (WSJ). OPEC+ to Weigh Production Cut to Bolster Oil Prices — Group to consider reducing output by 1 million barrels a day, as economic slowdown hurts demand (WSJ). Europe increases defence of energy assets after Baltic Sea ‘sabotage’ — Oil and gas operators in North Sea have reported unidentified drones near platforms (FT).

ASIA

  • China Shares Plunge to Lowest Valuation on Record in Hong Kong — Hang Seng China Enterprises has slumped to lowest since GFC, Unless China relaxes Covid Zero, hard to see catalysts: abrdn (BBG). China loosens FX restrictions in response to Fed rate rise — Regulators seek to allow more renminbi weakness but avoid runaway depreciation (FT). China Escalates Cash Injection Ahead of Golden Week Holiday — PBOC added 868 billion yuan via OMO this week, most since 2019, Stability is paramount ahead of party meeting: Maybank (BBG).
  • The Japanese yen is at 24-year lows. Here’s what to expect at the next BOJ meeting — The Bank of Japan reportedly conducted a foreign exchange check — a move seen as a precursor for a formal intervention. HSBC says BOJ will prioritize maintaining its yield curve control policy instead. UBS says chances of shifting away from its current monetary stance especially low under BOJ governor Kuroda (CNBC).
  • RBA Set for One Last Outsized Hike Before Lowe Slows Tightening — Most economists, traders see one more half-point hike Tuesday, CBA, AMP dissent as Lowe signaled plans for policy downshift (BBG). Australian House Prices Drop as Steep RBA Rate Hikes Sour Demand — Bellwether Sydney sees prices slide for eighth straight month, Slower pace of drop may not signal worst is over: CoreLogic (BBG).

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