A Bumper Fortnight Awaits

WHERE WE STAND – The clocks have gone back, the nights are truly drawing in, the central heating has been switched back on, and markets are now bracing for an incredibly busy fortnight ahead. 

Things have already got going, with the weekend bringing a couple of developments that need to be dealt with immediately, before contemplating the mountain of event risk that looms like Everest over price action. 

Firstly, Friday night/Saturday morning brought the long-awaited Israeli retaliation to the Iranian missile barrage launched towards the start of the month. At first glance, the nature of this retaliation seems relative limited, with strikes having targeted primarily military installations, and not oil or nuclear infrastructure.

If so, this could indeed be a situation similar to April, where plenty of face has been saved on both sides, and tensions now begin to subsided, even if only in the short-term. If so, one would expect a degree of risk premium to be priced out of crude, and for the bulls to lose one of their only sources of support - particularly with the demand outlook still rather dour. 

Secondly, is the matter of Japanese lower house election, where the ruling LDP-led coalition have failed to win a majority for the first time since 2009 – Ishiba’s big gamble just a month into the job has badly backfired. A significant degree of uncertainty now lies ahead, as the LDP scramble to find additional coalition partners in a bid to form a Government.

While that search goes on, both the JPY and Japanese equities are likely to come under pressure, as a greater political risk premium is priced, even if the knee-jerk move in the Nikkei has been to the upside, solely due to the currency correlation. The uncertainty should also deter the BoJ from any overtly hawkish signals at this week’s meeting, potentially even casting doubt on a hike at the December meeting, while the election all-but-certainly spells the end of PM Ishiba’s tenure.

More broadly, last week saw a chunky round of de-risking, particularly in the equity space, with the S&P having snapped a 6-week winning run. 

This, perhaps, shouldn’t be especially surprising, considering that the next 10 days brings - earnings from 5 of the ‘magnificent seven’; the UK Budget; the October jobs report; the presidential election; and, not forgetting the penultimate FOMC decision of the year. 

Further de-risking could well be seen short-term, with participants needing no reason to trim positions ahead of next week’s vote, with potential downside moves likely to be exacerbated were this week’s ’big tech’ earnings to fall short of expectations. Even if earnings were to beat, it’s relatively tough to have a high degree of conviction in sustained post-report upside, given the amount of risk on the horizon. The week ahead seems set to be one for the scalpers, rather than those with a more longer-term ‘modus operandi’. 

In fact, I wonder whether many in the latter camp might’ve already shut up shop for the year - at least to some extent. Beyond this fortnight of risk, there will be just two and a half weeks until Thanksgiving, which marks the practical end of the year for many anyway. Considering that the SPX trades around 25% higher YTD, many will ponder whether it’s worth risking those returns in what’s set to be a choppy near-term period, particularly in the event of a contested election result. Thinner liquidity could well become something of a theme, complicating an already choppy period for participants to grapple with. 

Elsewhere, fortune continues to favour dollar bulls, both as US economic outperformance remains the market’s primary focus, and amid lingering haven demand. The path of least resistance should continue to lead to the upside for the buck, at least over the short-term. Technicals also point in this direction, with the DXY having closed last week north of the 200-day moving average, while cable failed to reclaim the 1.30 figure, and the EUR remains capped by the 1.08 handle. 

Gold bulls are likely also feeling rather optimistic as the new trading week gets underway. The year so far has taught us that the yellow metal has obtained a near-unique ability to ignore its ‘traditional’ drivers, with moves likely instead being beholden to flows, presumably in large part from EM central banks. One could also view the yellow metal as a pure momentum trade, of the like which has been so significant over recent years. Either way, fading the market at fresh record highs isn’t something I’d be keen to do at this juncture. 

LOOK AHEAD – Calm before the storm’ sums today’s docket up, with the calendar (see below) lacking major releases before things properly get going tomorrow. 

That said, there’s plenty for Treasury participants to get their teeth into, though, with both 2- and 5-year supply due, as well as the initial financing estimate as part of the Quarterly Refunding Announcement. Last week’s sell-off was a chunky one, particularly at the front-end, with poorly received auctions today having the potential to exacerbate those losses. Even if, in the medium-term, yields around current levels should prove too alluring to resist, especially as the FOMC continue to move rates back to neutral in short order.