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Trader thoughts - are traders ready to chase returns into year-end?

Chris Weston
Head of Research
Dec 7, 2021
It's good times in markets – US and EU stocks are flying and traders ask, can this continue?

Clearly, the news flow has warranted higher equity index prices, notably with GSKs pre-clinical trial findings the market continues to pare back its worst-case scenario. China moving to a more supportive situation was something I talked up in my AUD overview yesterday and that's worth watching, especially the CN50, which is melting up and may be ready to make a bull push higher.

We’re now hearing that there's a deal to increase the debt ceiling that will be passed to the House – a simple 51 votes are needed. The debt ceiling was a big risk into year-end and we continue to watch developments, but the signs are we could see this issue being pushed back past the Mid-terms.

Equity Implied volatility has nosedived and we see the VIX back at 21.89%. This has allowed traders back into risk positions and selling vol has worked well with the VIX above 30%, resonating with shorts covering hard.

This Friday's US CPI print remains a hurdle for risk. A seven as the big figure may be good for the USD bulls and get 2-year Treasury yields pumping higher, but I think we need a steeper US Treasury yield curve to convince us about better growth in 2022. So looking at the differential between 2 and 5-year yields or 5s v 30s, I feel further pricing of rate hikes in the near-term that gets traders talking about ‘curve inversion’ may offer fodder for the bears and limit upside in equities and risk FX.

Interestingly, the highest volume traded in S&P 500 futures options has been December 4700 calls, with good volume in 4750 calls. Someone is in a bullish mood and betting on near-term upside.

The momentum traders point out that we haven’t had 3 days of gains in the US500 since early November – can that change? We’re pushing all-time highs as it is and given the benchmark is up 24.8% YTD, so it does certainly suggest that active manager chase returns – if the market continues to climb the wall of worry post US CPI and FOMC, then we could be looking at a solid move into the year-end. As always, keep an open mind. Ready to trade the potential opportunity? Trade it with Pepperstone.

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