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Author: Don Obrien

Market Noise Is Becoming Very Messy


One thing we are probably not going to have to worry about in markets in the coming weeks is volatility. The amount of noise assailing my eardrums from multiple directions is becoming very loud and conflicted. Chief amongst though is that old chestnut, inflation. Is it transitory or sticky? Well, that depends on who you are talking to. Overnight, the Bank of Canada abruptly ended its QE programme and signalled rate hikes are on the way. Similarly, the Brazil central bank surprised markets by hiking 1.50% to 7.75% to combat inflation and some anticipated pre-election fiscal largesse by President Fire-Starter. They also indicated that they would hike by as much again at their next policy meeting. Turkey’s dictator, meanwhile, has forced his central bank to cut rates despite rampant inflation. Long BRL/TRL anyone? Russia beat them all to the punch, hiking last week and the markets are locked and loaded for the RBNZ in November.

In contrast, the UK budget last night saw gilt yields sink as growth forecasts were upgraded for 2022, reducing the government’s projected borrowing requirement. The Bank of England hiking trade is suddenly looking very crowded. In the US, the inflation story is playing out mostly in the short end of the yield curve with yields rising there even as long-dated yields sink, leaving the US dollar stubbornly firm near the top of the week’s range. The Bank of Japan will, by contrast, remain unchanged at lower forever and this evening’s ECB policy meeting will more than likely feature the European Central Bank of Japan dampening longer-term inflation expectations even as they leave policy rates unchanged in negative territory. Europe is no closer to removing the monetary punch bowl to keep the lights on than they were a decade ago. It’s great if you are German though, as markets pay Germany to borrow from them. Even Australia, where the RBA has let more doves fly than Prince, seems to be on the cusp of changing tack, declining to intervene today to cap 3-year yields at their 0.10% target.

Fed expected to hit taper trigger

That mixed bag will receive another member next week in the form of the latest US Federal Reserve FOMC policy decision. The FOMC should announce the start of their tapering of QE, and this is a trade that has either been ignored by markets because it didn’t suit their buy everything narrative or has been woefully under-priced. Interest rates will still be near zero per cent even after QE is tapered, but in a world addicted to, and expecting the Federal Reserve to backstop the speculative excesses of the world, one shudders to think what a good dose of reality will bring to financial markets. One sweetener for the Fed to stay dovish going forward appears to be coming from Washington DC. The Democrats spending and tax plans appear to be in more disarray by the day and whatever emerges, if it does, will be a shadow of its former self. The Republicans won’t have to do any campaigning for next year’s mid-terms at this stage, the factions within the Democratic Party will do the job for them. Usually, that’s good for equities, American investors like government paralysis. Tonight’s US PCE Prices and Core Prices data may present a more near-term threat though if prices jump above forecast, with a lower GDP print already priced into markets.

The equity space is just as confused. China’s Evergrande faces another offshore coupon payment deadline tomorrow, with China’s government still relatively silent on the issue other than to tell the founder to use his own money to pay debtors first. The Communist Party Central Committee meeting looms between the 8th and 11th of November. President Xi’s shared prosperity policy hasn’t suddenly gone away and nor have the travails of the property sector. The delta variant is also girding itself to challenge the country’s Covid-19 zero policy and that’s on top of China’s energy crunch and supply-chain issues. Yet some notable commentators are urging investors to fill their boots and buy the dip in Chinese equities. On the regulatory challenge front alone, I’m not sure the repricing of risk into equity prices is complete; let’s hope they’re right. If anyone needs evidence to this fact, Reuters is reporting China’s state planner has met with representatives of China’s coal sector to help better identify those “profiteering” from soaring coal prices. China coal futures are limit-down this morning.

I must apologise to readers yesterday as I had the Apple results out by a day. Today is Apple day in fact and Amazon also releases its quarterly earnings as well. Although tech giants outperformed last night, it wasn’t enough to hold the Nasdaq in positive territory. Other indices sunk despite excellent results from the likes of Ford, and it seems that the US earnings story is running out of momentum. I expect both Apple and Amazon to deliver crowd-pleaser results today, but if Wall Street can’t rally on that, it may be time to batten down the hatches ahead of the FOMC next week which I continue to believe, is the one ring to rule them all. I note that Asia has steadfastly refused to buy into the American dream this week, with equity markets trading on the heavy side. China nerves will be part of that story, but so will the contradictory noise coming from the energy, commodity, fixed interest, and virus spaces amongst others. Samsung’s results are a classic case in point today. Excellent earnings but sounding warnings of memory chip prices and demand next year and supply chain disruptions while forecasting a recovery in corporate IT demand. A bit of a head-scratcher that one, especially as it is on both sides of that trade as a manufacturer and consumer.

Currency markets and precious metals are by contrast an ocean of calm, even as equity and bond markets are chasing their tails. Base metals have started to roll over and even energy prices look like they are on the cusp of a temporary correction lower. The China energy crunch and the prospect of lower refined metal and factory production could explain the base metal space. The prospect of Iranian oil returning to international markets, the energy space.

Markets tend to get very noisy with confusing movements before a large directional move. Nowhere is that more apparent than the crypto-verse. Bitcoin and ethereum have fallen this week as the post-ETF nonsense wears off and both are potentially on the cusp of a large correction lower. Meanwhile, another coin with a picture of a dog, Shiba Inu, has rallied by over 200% this week, making it a crypto-meme I suppose. I note it is not even built on its own code; it uses ethereum’s. Anyway, the price is super cheap, as opposed to the big two, and the retail space has piled into it in a meme-orgy. I received a TikTok today (as a file attachment, I don’t have an account. My daughters don’t want Dad in their “space”), in which had a bloke in a football shirt was exhorting viewers to “hold on and not sell” their cute doggy picture coins. He says hold on, I say pump and dump. And don’t get me started on (un)stable coins, supposedly back one-for-one with US dollars but whose issuers are incredibly elusive at proving just that.

The noise continues in Asia where the Bank of Japan, which has just left policy rates unchanged at -0.10% while downgrading CPI and GDP projections for 21/22, whilst slightly upgrading both for 2022/23. In Australia this morning, export prices rose by 6.20% in Q3 QoQ, but import prices rocketed higher to 5.40% from 1.90% previously as imported inflation rears its head. Australian 3-year CGB’s are trading at 0.50% this morning in response after the RBA did not intervene to cap rates at its 0.10% target. Yes, you read that correct, 0.10% target.

The Caligula’s of volatility will be loving life now, but like any one of his orgies, you get unlimited wine, but you risk getting chopped up as well. The contradictory noise across asset classes is signalling a big move is coming and I believe next week’s FOMC could be the catalyst if the FOMC holds its nerve. I am erring to a higher US dollar, higher US yields, lower equities, and a bit of a reckoning in the crypto-space. In the meantime, I’m going to fetch my earplugs.

 



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Oliver Bolt

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