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The China CN50 and AUS200 look particularly weak, while EU equity markets are in steep decline, with price breaking level after level. In the US, the NAS100 has fallen for four straight days and sits on a huge support zone seen between 14,560 and 14,430, with the US500 eyeing the 4 Oct swing low at 4200 – if these levels are broken this week and SPX 20-day realised volatility rises, then market chatter will centre on the S&P500 pushing towards 4000.
The contrarians have started to look at sentiment and throw out a range of charts, including deteriorating market breadth and the number of stocks (in an index) below the 20-, 50- or 200-day moving average, that have an RSI below 30, or resides at 4-week lows. On current standings we’re not yet near a point of maximum bearishness. The CNN Fear and Greed can do a good job capturing the mood across markets and this says a similar message.
The time for contrarianism is approaching – and who doesn’t love a tradeable V-bottom – but the risk to reward trade-off hasn’t shifted enough just yet.
Maybe corporate earnings can have a more positive effect and stabilise sentiment. Perhaps those who hedged into the weekend will want to part unwind those hedges – we’ll have to assess the news flow as it could lead to a lively open in our equity indices and underlying futures at 09:00 AEDT.
With 43% of the S&P 500 market cap reporting this week, this is the week it could happen, and guidance and outlooks from CEOs can play a more important role. The macro matters though, and we continue to focus on geopolitical headlines, moves in the US 10- and 30-year Treasury, volatility, and energy markets. With bonds offering no defence in the portfolio, traders continue to manage drawdown risk through volatility, gold, and the CHF as the preeminent hedges.
The USD hasn’t performed as well as some had hoped through this period of equity drawdown and rise in long-end bond yields. One factor is that we’re seeing a rise in EU and Chinese growth momentum, so the rest of the world is looking less bad. We also regress and understand that the CHF acts more like gold in times of geopolitical tensions, and after a 7.8% rally between July and October (in the DXY), consolidation in the USD index was always a possibility.
Keep an eye on USDCNH and USDJPY as a guide, and the fact we see both pairs in a sideways consolidation is keeping broad G10 FX volatility subdued and a factor that is holding the USD from moving freely on a broad FX basis.
As many try and pick a turn in equity markets, a bounce in risk this week can't be ruled out, and we need to be open-minded to all possibilities – its fighting evolving momentum though and many will prefer to initiative (or add) shorts into any rallies, rather than fight it. Buying risk when it's darkest and sentiment is rock bottom is a well-adopted market philosophy but I’m not sure we’re there just yet.
Fed speakers – Powell (26 Oct 07:35 AEDT – Powell is unlikely to offer any new market intel at this event). Waller (27 Oct 00:00 AEDT) and Barr
BoE speakers – Cuncliffe (27 Oct 03:45)
RBA speakers – Gov Bullock (24 Oct 19:00 AEDT) & Bullock and Kent both appearing at the Senate testimony (26 Oct 09:00 AEDT)
Marquee US earnings and the implied move on the day of earnings (derived from options pricing) – on the week we see 43% of the S&P500 market cap reporting. Marquee names include - Alphabet (4.8%), Microsoft (4.1%), IBM (2.7%), Meta (8.6%), Amazon (6.4%), Intel (6.6%), Exxon (2.4%)
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