A Week in the Markets: 11th October

Nasdaq 100

5D: +0.09%, 1M: -3.55%, 3M: -0.83%, 1Y: +25.90%

This week saw another bumpy ride for US stock indexes and the Nasdaq was no exception. Investors continued to rotate out technology stocks on Monday amid rising bond yields, seeing the Nasdaq dip 2.1% to 14,255.48. The technology-centred rout was then hit further by Facebook’s six-hour outage and whistle-blower claims which saw its shares close almost 5% down on the day. Having then rebounded slightly on Tuesday and Wednesday as investors bought up the tech dip, further positive news from Mitch McConnell and Chuck Schumer regarding a debt-ceiling extension left the Nasdaq up 1% on Thursday. Friday brought the much-anticipated September employment report, however the tepid 194,000 jobs added fell well short of expectations. Regardless, market futures absorbed the disappointing shock and pushed higher with the Nasdaq rounding off the week up 0.09%.

Next week the market will continue reacting to Friday’s disappointing employment report and more importantly the Fed’s response. Despite falling massively short of the expected 500,000 added jobs, analysts expect this will not deter the Fed from announcing plans to begin easing policy. This is because Fed chair Jay Powell has stated that only a “decent” report would mean a start to asset tapering as the employment threshold required would be met. Therefore, despite the poor jobs numbers, the Fed will likely look to the reduction in the unemployment rate from 5.1% to 4.8% as the basis for their ‘significant progress towards maximum employment’. Thus, with the Fed drawing back on their $120bn/month bond buying programme, inflationary fears should diminish slightly and provide a boost to the tech-heavy Nasdaq. This is because high inflationary pressures, resulting in rising bond yields, are particularly punishing for high growth tech stocks as it is harder to justify their valuations. Investors will also be watching out for the publication of US CPI data on Wednesday, however, as with the employment report, the market sentiment is that the Fed will not be likely to divert from their November tapering plans regardless of inflation data. Furthermore, despite facing Washington drama, high crude oil prices and a weak jobs report last week, the Nasdaq rebounded strongly and demonstrated market strength. And it looks like it will only improve as third quarter earnings season kicks off next week, with another strong series of reports expected.

Nikkei 225

5D: -2.51%, 1M: -7.68%, 3M: +0.39%, 1Y: +18.8%

The Nikkei 225 finished lower at ¥28057.02 (chart above) despite a gain of 1.34% compared to the previous day closing. The Transportation, Real Estate, and Paper Pulp sectors were the beneficiaries of this bounce despite a decrease of 2.60% from a week ago. This week’s poor performance is a mixture of risk-off behaviour due to Evergrande and Chinese Real Estate debt woes. At the same time, the risk of “Transitory Inflation” might not be that transitory in the US. Lastly, investors' confidence with the arrival of the new Japanese Prime Minister Fumio Kishida led to further dip buying at first; however, the mood did not last long, with those post-Suga gains being erased due to markets expecting continuing policies under Kishida’s governance.

Looking forward, Japanese stocks should remain unstable like the rest of the East Asian markets due to the debt crisis within the Chinese stock markets. With the Yen also trading lower compared to the other haven currencies, the calendar next week will decide if it continues in this trend with the announcement of the Japanese PPI, Tankan Index, Core Machinery Orders, Trade Balance, and Industrial Production. The direction of the results should affect the confidence of foreigners in buying both the Japanese currency and the Nikkei.

Lastly, the recent speech from Fumio Kishida at the Japanese parliament on a '' new form of Japanese capitalism" was seen as a bearish stance for investors. His talk on further redistribution and higher taxes is negative during this period of dip-buying, especially concerning investors with plans to raise investment income, dividends, and sale of shares taxes. However, Kishida was expected to continue similar policies with this announcement on such short notice since he needs to reassure his new prime minister status before the incoming general election on October 31st. Therefore, the Nikkei should not change abruptly from any dip-buying until the general elections but could continue going downwards from a perspective of negative sentiments from other Domestic and International factors.

US 10-Year Treasuries

5D: +15.7bps, 1M: +27.2bps, 3M: +25.3bps, 1Y: +83.6bps

US 10-Year Treasuries experienced a continuation of the strong selling pressure that has been seen since late September. With yields approaching the April high of 177bps, as they advanced a further 15.7bps, finishing the week at 161.5bps. The first 4 days of the week saw a string of strong economic data releases beating expectations that improved confidence that the Fed will announce its tapering its asset purchases in November. Beginning with strong Factory Orders and ISM Non-Manufacturing PMI on Monday and Tuesday respectively. Before important employment data beats in the form of both ADP Nonfarm Employment Change and Initial Jobless Claims. However, throughout the week markets moved predominantly in anticipation of the reading for the last Nonfarm Payrolls before the next FOMC meeting. The nonfarm payrolls headline figure for job creation was a big disappointment coming it at 194K, over 60% lower than the median forecast of 500K. As well as a surprise drop in the participation rate to 61.6% which highlights a key concern around labour supply in the US. This initially creating a strong bid for US Treasuries as algos kicked after the big miss and many market participants saw this as reducing the possibility of tapering beginning in November. But beneath the surface this figure is not as bad as it seems, as the unemployment rate fell significantly more than expected to 4.8% rather than the consensus of 5.1% and a larger jump than forecast in average hourly earnings of 0.6%. In addition, there was a large upward revision to the previous month’s NFP release and so markets taking these things into account alongside the significant inflationary pressures, didn’t change their expectations of a tapering announcement in November. This allowed yields to resume their upward move higher as they broke above 160bps in the hours following.

Looking ahead to next week, Monday is particularly quiet before an interesting JOLTS Job Openings reading on Tuesday as well as a crucial 10-Year Note Auction, which will be a great indicator for demand for Treasuries after the recent sharp rise in yields. On Wednesday there is the much anticipated Core CPI reading for September which is expected to rise from 0.1% to 0.3% (MoM). This reading will be well watched amid rising inflationary concerns across the US and global economy. Following on, there will be the release of the FOMC meeting minutes later in the day. This combined with the more up to date speeches of FOMC members Bostic and Williams will be keenly analysed for any deviations from the current consensus of a November tapering announcement. On the labour market side, Initial Jobless Claims on Thursday will be particularly important after a big miss last week on NFPs. Core Retail Sales will be a useful indicator of the state of demand pull inflationary pressures within the US economy. It is my view that the supply chain strains, labour shortages, rising commodity prices and strong post-lockdown demand will continue, creating high inflation for longer than markets are currently pricing. As a result the path of least resistance for US Treasury yields is definitely upwards and it is my view they will continue upward over the upcoming week.


5D: -0.08%, 1M: +0.57%, 3M: +4.35%, 1Y: +1.12%

The INR/KRW pair closed at ₩15.924 after yoyoing this week from the different regional and international risk-off environments from the Chinese debt crisis affecting most East Asian Markets, the global energy crisis and inflation worries. The ­­­­Korean Won’s volatility results from a week of positive news despite finishing lower with new ongoing talks with North Korea. The recent announcement of South Korea joining the CTPP and announcing positive domestic vaccination results also contributed favourably. However, it is still in the middle of its worst wave in the pandemic while being heavily affected by the high exposure to global demand for its chip exports and the global supply chain bottlenecks.

For the Indian Rupee, the energy crisis has impacted India in finishing higher than the Won as one of the heavy buyers of Oil and Gas. However, it has crumbled due to fears of domestic inflation and a higher trade deficit compared to other currencies. Furthermore, the RBI surprised analysts by suspending their Quantitative easing program (GSAP) while keeping the interest rate unchanged. The economic recovery and the potential seen from the size and population from investors has also allowed the local BSE Sensex and NSE Nifty stock markets to gain higher.

Looking forward, the RBI could cut loose the accommodative monetary policies to decrease the concerns over inflation which should also impact a hike in reverse repo operations. The continuation of these favourable policies towards pre-covid era recovery will be tested this incoming week with the announcement of the Industrial Production, Manufacturing Output, Trade Balance, and the CPI. The forecasted numbers show a positive outlook from the beginning of the year where Covid heavily impacted India. On the Korean side, the BOK should keep its interest rate at 0.75%. In contrast, the announcement of the Unemployment rate, Trade Balance and Import / Export Index should give investors a good look at how South Korea is recovering economically.

Brent Crude Oil

5D: +5.07%, 1M: +14.17%, 3M: +6.65%, 1Y: +96.42%

Oil prices continued to rise at the start of last week in wake of the OPEC+ meeting. Monday saw OPEC+ confirm it would stick with current output policy despite pressure for a larger production boost, leading to a 3-year price peak with Brent crude hitting $83.08/barrel. Prices were then further fuelled by the rising gas prices which continued to spike. However, the price pressure was alleviated slightly on Wednesday after Putin announced that Russia would send more natural gas to Europe. Wednesday also saw the US Energy Information Administration report that US crude inventories rose by 2.3m barrels for the week, as well as US Energy Secretary Jennifer Granholm alluding to a release of strategic petroleum reserves (SPR). As such, oil prices started to pull back in the latter half of the week. This was until it was announced that the US would in fact not be releasing the SPR, seeing prices exceed $83/barrel.

For the week ahead, there is a muddied outlook for oil prices. Demand for oil continues to grow as economies re-emerge from the pandemic, whilst supply is still lacking. All of this is also underpinned by the added price pressure from record-high gas prices in Europe. However, as seen this week oil prices could also settle down if production levels for both gas and oil can rebound. On the gas front, Fatih Birol (IEA director) has suggested that Russia could raise exports by roughly 15% to Europe and significantly help alleviate the gas crunch. Meanwhile steady US inventory rises in wake of Hurricane Ida has also shown signs of improvement. Although, Monday’s OPEC+ meeting, in which they committed to keep a modest production rise of only 400,000 barrels/day in November, signalled very little if no intention to submit to governmental pressures to help reduce oil prices. Moreover, the US government’s announcement that there will be no release of SPR also signals that production rates will remain in the deficit for the meantime. Overall, market sentiment is that the $80/barrel price mark provides a strong floor for Brent oil and so there is little expectation the market will fall apart anytime soon. As such, last week further proved the strength of the oil market and some analysts are predicting that crude oil is more likely to hit $85/barrel instead of back down near the $75/barrel level.

Thank you to Ben Turner, Sam Perrett & Marco Tarchoune for your in-depth analysis!

All images have been sourced from TradingView.com

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