Here is a daily progression of my trading thoughts
( 4:00 AM)US stocks are again lower on Wednesday as thin liquidity and geopolitical headlines exacerbate inflation and monetary policy concerns, as investors cast a wary eye on the outlook for next year. Against a backdrop of low-volume trading and an empty data docket, this week's unscheduled news from China and Russia introduces an unexpected shudder of uncertainty into the year's final week. On Wednesday, markets are leaning into a defensive posture as investors contemplate the implications of Russia's new oil ban and China's reopening. But, in case you needed clarification on whether the downturn is actualizing, Wednesday delivered a considerable decline in pending home sales, which fell 4% MoM, quadrupling the expected decline. Now the bad news: even weaker economic figures will show up in early 2023 as the lagged effect of Fed policy bears down on Corporate America. This uncertainty is leaving the Fed fumbling in the dark. Turning back to markets, yields on 10-year Treasuries continue to creep higher, rising to 3.88%. There is a laundry list of reasons to cast your other wary eye at the rate cuts traders who expect the Fed to oblige in the back half of 2023. The most obvious is that inflation isn't especially likely to be on a sustainable path back to 2% anytime soon. It is precondition officials have made abundantly clear must be met before the Committee would consider taking its foot off the brake, let alone tapping the accelerator, however lightly. Oil is also down and likely symbolic of the market's overriding feeling of uncertainty around recession and the Fed policy outlook. The combination of less Russian supply and increased demand from China's reopening should be positive for oil prices.
Confirmation Bias
( 8:00 AM) Current price action supports most of Wall Street's 2023 outlook, and with ample confirmation bias tagging along, the market remains exceptionally droopy. Not to mention it is incredibly challenging for investors to spin a constructive story with both bonds and stocks selling off.
And if the recession theme takes on more weight, S&P 500 is undoubtedly NOT priced for a hard landing; here, I would reference the volatility surface, cyclical-vs-defensives or the simple PE multiple.
Still, I warn my backers who wonder why I'm not shifting into " Hammer Time Mode" by telling time not to read too much into this week's low volume /liquidity price action. Many factors affect stock market performances during the winter holiday; least of all, institutional investors are forced to turn very transactional into quarter-end and year-end rebalancing activity.
But most of all, bank traders and liquidity providers are on guard not to let short-term losses ruin their holiday spirit or lead to irrational moves trying to mitigate the inherent risk of miss calculated bets. And everyone is cautious down here, knowing big trouble has come, as usual, with the bias to be short of S&P 500
Transactional year-end activities are also snaring Forex markets in tight ranges. December has seen the US equity markets underperform other major markets. The S&P 500 has weakened by more than 6% since the end of last month. Hence hedge funds that need to rebalance hedge positions must buy USD at month's end.
China's reopening will not immediately punch your ticket to oil price Nirvana.
( 11:00 AM)Despite Oil investors trying to figure out what the Russian ban means and how many more Urals cargoes will find their way to China and India, we remain constructive on oil prices in the near term, given the potential for improving China demand, slower shale growth and OPEC+ quota reduction.
However, given the constantly building recessionary narrative, investors will likely temper expectations for 2023 picking up on insider calls for the Brent markets to settle into the $75-$100 range in Q1( $87.50 midpoint), as supply tightness and recession fears continue to pull traders in different directions. China's reopening will not immediately punch your ticket to oil price Nirvana as, at this stage, the reversal of zero Covid policy is merely tempering a broader recessionary tail risk for oil prices and not an immediate demand boost. So oil markets are more prone to THE BIG BOARD risks coalescing around the recessionary narrative at this point. But the sequential improvement in Chinese activity should be oil price favourable as it will likely offset weaker demand and some in Europe and the United States. Despite commentary pointing negatively to the Covid waves, three huge waves are in the models, so the oil market will only turn upside down if China's policy U-turns and moves back into lockdown mode. This an unlikely scenario as China is unlikely to lose face over this central policy pivot.
Deja Vu All Over Again.
(1:00 PM) China's grand reopening after three years of government-imposed isolation was supposed to be a boon to the global economy, help skirt a deep recession and rescue risk sentiment after a cruel year for an array of financial assets.
Instead, Xi Jinping's economically motivated abandonment of strict virus containment protocols is providing markets with an inflation headache and a sense of Deja Vu all over again, smacking weary investors right in the chops.
With daily infections in China reportedly hitting 40 million and little to no visibility into the state of the nation's outbreak, health officials in other countries fear an upsurge in cases tied to Chinese travellers, who are now unshackled to fly around the globe,
China's Covid tsunami is also causing a high degree of consternation over the prospect of Bloomberg flashing red headlines announcing the identification of a new strain which is particularly concerning, especially with nerves already frayed after a year of rate hikes, surging inflation and a messy war on NATO's doorstep.
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