Stocks Slump As The Buck Bounds Higher

WHERE WE STAND – Another day lacking major catalysts yesterday, seeing markets do little more than tread along the near-term ‘path of least resistance’ once again, for the third day running this week.

As a result, the dollar continued to grind higher, with the DXY rising north of 104.50 intraday, touching fresh highs since late-July. Though Fed pricing does appear to have become overly hawkish, with the USD OIS curve now discounting just 38bp of further Fed cuts by year-end, the dollar’s recent bull run looks very solid indeed, as the G10 FX market continues its pivot away from the relative pace of policy normalisation from G10 central banks, and back to a focus on relative growth differentials.

Consequently, it’s unsurprising to see the buck’s gains remaining broad-based against peers, with the economic outlook ex-US at best pointing to anaemic growth, and at worst signalling stagnation. Yesterday saw the EUR surrender the 1.08 handle for the first time in almost three months, while cable dipped under 1.2950. That said, the JPY remains the most eye-catching of all, with USD/JPY having risen north of 153 yesterday, to its highest since late-July, blasting through the 200-day moving average in the process.

Jitters ahead of Sunday’s election continue to play a role here, while momentum traders are likely also piling in after the aforementioned break of the 200-day MA. From a technical perspective, there seems little by way of resistance until the 155 figure, while one-week implieds trade to 11.5%, the highest level in a fortnight, implying a punchy +/- 2 big figure range over the tenor.

Of course, the continued sell-off across the Treasury curve, which bear steepened for a third day running, is also continuing to pose stiff headwinds to the JPY. It must be said that the move in the Treasury complex still lacks an obvious catalyst, instead likely being a reflection of increased optimism on the US economic outlook spilling-over from last week, given the dearth of data released so far this week.

Despite that, as noted yesterday, yields at these levels are likely to prove too alluring for participants to resist, particularly with the 10-year now trading north of 4.25%, and the 30-year above 4.50%. Taking into account the FOMC continuing to remove policy restriction, one might well be foolish not to lock in these yields while it’s still possible.

One also wonders the degree to which continued Treasury selling is impacting risk sentiment more broadly. Yesterday, the S&P lost ground for the third day running, the worst such run in almost 7 weeks, while the Nasdaq fell as much as 2% intraday, with both indices notching their biggest one-day declines since early-September.

Despite the slide in stocks, likely a result of continued pre-election de-risking, the medium-term path of least resistance continues to lead to the upside. My long-standing bull case remains intact, with economic growth strong, earnings growth solid, and the forceful ‘Fed put’ continuing to backstop sentiment.

That ‘Fed put’, really, is a global ‘policy put’, with G10 central banks now normalising policy in a relatively synchronised manner. That was again evidenced yesterday, with the BoC delivering a ‘jumbo’ 50bp cut at the conclusion of the October meeting – in line with expectations – while also reiterating that further cuts are on the cards, if the economy continues to evolve in line with expectations.

This synchronised pace of policy normalisation should continue to act as forceful support to risk sentiment more broadly – once the election is out of the way – while also tilting the balance of risks towards a rally at the front end of DM curves, and seeing the FX market’s focus remain on relative growth dynamics.

Elsewhere, yesterday, the intraday move in gold is worth a mention. Having hit a fresh record high – for the 5^th day in a row – the yellow metal experienced a rather brutal reversal, sliding over 1%, back towards the $2,700/oz figure. While one intraday move is far too little to point to and call an end to the recent rally, goldbugs might still be a little concerned about yesterday’s declines. Personally, I’d prefer to see some more concrete signs of a ‘top’ being formed before even thinking about starting to fade the recent run higher.

LOOK AHEAD – Finally, a day with some (relatively) interesting points on the data docket.

The latest round of ‘flash’ PMI surveys stand as the first such highlight, albeit the figures seem unlikely to tell us much fresh information, instead reinforcing long-standing market biases. On such a note, the data is likely to point to a further contraction across the eurozone economy, as well as a modest pace of expansion here in the UK. Stateside growth, though, should continue to outperform that of peers, especially in the services sector, though the more widely-watched ISM PMI gauges are not due for another couple of weeks.

Meanwhile, the latest US jobless claims figures are also due, with the continuing claims print – exp. 1.875mln vs. 1.867mln prior – coinciding with the survey week for the October jobs report, due next Friday. That report, of course, is likely to be significantly distorted as a result of the impact of Hurricanes Helene & Milton.

Elsewhere, central bank speakers are out in force once more, with the highlights (in the loosest sense of the word!) being remarks from ECB Chief Economist Lane, and BoE Governor Bailey – the latter speaking for a third day running, aren’t we spoiled!?

Earnings season also continues today, with airlines coming into focus, with the likes of American and Southwest reporting before the open.