Stock market retreat eyes next weeks US CPI

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.

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 15^th August and tagged on 30^th October) trader anticipation of further advances next week would be largely intact.