Stock market retreat eyes next week's U.S. CPI

The speed with which the post Mid Terms global stock market rally crumbled may not bode well for next week.

Stock market retreat eyes next week's U.S. CPI

Summary

The speed with which the post mid-term global stock market rally crumbled may not bode well for next week.

Busted flush

Given that most of the triggers were not major surprises, the outsize negative reaction by equities unmasks the post Mid Terms rally as a busted flush.

Figure 1 – Stock market indices snapshot 09/11/2018 15:05

Source: Refinitiv/City Index

U.S., China PPI diverge

The Fed statement was largely in-line. Chinese inflation was mostly as expected too, except for the annualised producer price figure that missed expectations. That was largely due to a relatively strong reading in October last year. Still, the sharp equities sell-off that ensues as a reinvigorated dollar buoys Treasury yields back towards Thursday highs is not entirely a groundless reflex. A little earlier, yields and the dollar saw an extra fillip from the biggest producer price inflation rise in over six years, backing the case for the Fed to stick with its quarterly hiking path; the tacit message of its statement. Furthermore, the latest data to stream over from China remind investors that rising challenges to global growth that emerged this year are bedding down for the long term, rather than easing off. The dollar index’s re-approach to a 16-month high this week simply underscores that tightening financing conditions will continue to limit scope for sputtering emerging market growth to find a solid footing.

Dollar Index positions for U.S. CPI

Over the medium term, these conditions possibly open the door to further currency shocks as seen over the summer. For the very short term, thinking about next week, U.S CPI data, which have tended to give the dollar an even headier charge this year than PPI, are due next Wednesday. If as robust or more robust than forecast, they may catalyse the dollar into or even beyond 2018 highs marked at the end of last month. The broader market outcome is likely to reinforce the bear trend in Treasurys with a strong melt-up in yields. We would expect another yield advance to lift the VIX gauge of U.S. stock market implied volatility above the floor that formed in October and so far, this month, well above the 15 level. Under such circumstances, the stock market would face a return to turbulent conditions that struck last month. It’s worth watching the dollar index for signals. The 2018 high of 97.20 was 42 ticks away, a short while ago. The high is a clear focus for speculators. These participants would also tend to judge momentum oscillators (like the stochastic gauge in the chart below) as another all-clear for further gains. Should DXY close this week near the range marked out by a staging-post high of 96.984 (created on 15th August and tagged on 30th October) trader anticipation of further advances next week would be largely intact.

Technical price chart: InterContinental Exchange Dollar Index – daily intervals


Source: Refinitiv/City Index

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.