A Trip Along The Path Of Least Resistance

Where We Stand – A slightly sluggish-feeling start to the week yesterday, with US markets partially closed for Columbus Day, and those markets that were open not doing especially much of interest, with volumes relatively light across the board.

External catalysts were similarly lacking, with the data docket having been almost entirely barren – barring some sub-par trade data from China – and news flow also rather thin on the ground.

In such an environment, it was unsurprising to see equities continuing to take the path of least resistance to the upside, with the S&P notching a new record, demonstrating the natural positive drift with which everyone is familiar, as the front future rose north of 5,900 for the first time.

My bull case – strong earnings growth, solid economic growth, and the forceful ‘Fed put’ as a backstop – remains intact, even if incoming US data is likely to become rather messy for the next quarter or so, as evidenced by last week’s rather dismal jobless claims figures.

Nevertheless, that shouldn’t be enough to derail the bull market, with dips likely to remain relatively shallow, and continuing to be seen by participants as buying opportunities. The start of ‘big tech’ earnings next week is the most obvious risk on the horizon that must be navigated, with the market likely to drift higher until then.

Elsewhere, markets were also relatively quiet, though the greenback continued its recent strong run, with the DXY rising further north of the 103 handle, to fresh 2-month highs. While the USD OIS curve still looks a little too hawkish, with just 38bp of cuts priced by year-end, the FX market appears to be back in a ‘buy growth’ mindset.

In this respect, there is little option other than the greenback – the Chinese recovery remains anaemic, with stimulus falling short of expectations; the eurozone remains deep in the doldrums; the UK economy is bracing for a brutal round of tax hikes in the 30^th October Budget; plus, the outlook is far from rosy elsewhere in places such as Japan, Australia, and New Zealand.  For now, participants have moved back to the left hand side of the ‘dollar smile’, with a renewed focus on US economic exceptionalism.

On the day, yesterday, the AUD & NZD were the worst performers in the G10 space, almost entirely in reaction to China’s disappointing weekend press conference which lacked specifics on the shape or size of fresh fiscal stimulus, which participants continue to crave.

In similar fashion, some wind came out of crude’s sails, with WTI slipping around 2% on the day, re-testing the lows from last Thursday. OPEC trimming demand forecasts for the third month running won’t have helped here, either, though the market continues to price an elevated geopolitical risk premium, remaining on tenterhooks for an Israeli response to the Iranian missile barrage launched two weeks ago. Short crude still isn’t a position I’d be keen on holding for any length of time, even if overnight reports did indicate that the aforementioned response may well be limited to solely military targets.

Look Ahead – A busier data docket awaits today, as US participants return from the long weekend.

This morning’s UK employment figures stand as the most notable release, though with the ONS inexplicably still struggling to produce accurate labour market data, BoE policymakers continue to place relatively little weight on the data, with tomorrow’s CPI report of much more importance in terms of the policy outlook. Nonetheless, unemployment is set to have remained at 4.1% in the three months to August, while earnings growth is set to continue cooling, with overall pay seen rising 3.7% YoY, 0.3pp slower than the July print.

Elsewhere, today, CPI figures are due from Canada, and New Zealand, with the former of particular importance given the market continuing to price around a 55% chance of a 50bp BoC cut next week. The latest German ZEW sentiment surveys are also set to be released and, in a rare twist of fate, could be somewhat optimistic, with the headline ‘Expectations’ metric set to notch its first MoM increase since June.

Another handful of central bank speakers also await, including FOMC members Kugler and Daly, while earnings season steps up another gear, with a busy pre-market slate including reports from BofA, Goldman, Citi, J&J, and UnitedHealth – the latter being the biggest single stock by weight in the Dow.