Markets Set For A Choppy End To The Week

WHERE WE STAND – It had, for the most part, been shaping up to be a relatively dull Thursday for financial markets.

However, while those ‘tumbleweed’ vibes persisted for most of the session, participants seemed to throw something of a tantrum late on in the session – there being no correlation, I’m sure, between this slump in sentiment, and my trip to the Jampot. Incidentally, it was probably the busiest I’ve seen said venue all year, probably as we all front-run the inevitable autumn Budget tax hikes here in the UK.

Anyway, I’m never one to try and assign narratives to the price action, least of all on a Friday morning. Still, trade jitters persist amid the threat of 100% tariffs on Chinese imports to the US at the end of the month, while there was also plenty of chatter about regional US banking issues doing the rounds during yesterday’s session. To be frank, on that latter point, the US clearly has far too many banks right now, meaning some consolidation wouldn’t go amiss. Furthermore, I struggle to worry about that as a major issue when the Fed are >100bp north of neutral, and have probably the most restrictive balance sheet settings in about half a decade, giving plenty of firepower to stave off whatever they may need to. Anything to take up column inches, I guess…

While the rumour mill runs amok, we remain in a vacuum of both data, and concrete news flow, not least on the trade front, especially as the ongoing US government shutdown continues to postpone the release of essentially all the prints that we would usually care about.

We did, though, receive August’s UK GDP figures, which pointed to the economy having grown by 0.1% MoM, rebounding from a downwardly revised 0.1% MoM contraction in July. For all intents and purposes, the data confirms that growth remains anaemic at best, with that being unlikely to improve any time soon, given the pre-Budget uncertainty now acting as a drag on activity, and further stiff headwinds from the inevitable tax increases that will be delivered on 26th November. It’s all ‘sunshine and roses’ here in Blighty right now…not.

As for markets more broadly, yesterday, as noted above it proved to be a risk-off day, even if that risk aversion lacked an especially obvious catalyst.

Understandably, though, conviction remains lacking, as the latest round of Trump tariff threats continues to hang over markets like the ‘sword of Damocles’. It must be said that there’s not been much by way of new info on that front, though my working assumption remains that the latest round of tariff threats are a negotiating gambit, and that tensions will indeed de-escalate in relatively short order.

That said, it seems likely that things will remain relatively cagey for the time being, at least until those tariff threats are walked back in a more formal manner. You’d also imagine that desire to hold long risk positions over the weekend could be somewhat lacking too, given the ‘spicy’ nature of trade this time last week.

Still, the underlying equity trend remains a constructive one, in my view, with earnings solid, underlying growth resilient, and the monetary backdrop becoming increasingly loose. Taking a step back, and eliminating some of the recent noise, the path of least resistance continues to lead to the upside over the medium-term, and I continue to view dips as buying opportunities.

In any case, with the S&P up 30ish% from the April lows, we’ve undoubtedly come a very long way, in a very short space of time, hence this current consolidation may not be a bad thing, especially if it, along with a resolution to the latest bout of trade tensions, sets us up in turn for a solid rally into year-end. FOMO + FOMU + buybacks accelerating + the strong bull case mentioned above should prove a powerful mix to fuel gains.

Back in the here & now, with unsurprising predictability, gold notched fresh record highs yesterday, with silver also gaining ground, amid what remains frankly ridiculous levels of physical demand in both cases. To a degree, said demand is price-insensitive, especially in the case of the latter where the ongoing supply crunch, and subsequent short squeeze, continues to fuel these explosive moves.

Besides that, the dollar drifted a little softer on the day, though frankly trade in the G10 FX complex remains turgid, and overall rather dull, in nature. My bias remains towards dollar longs, given that risks to the economic outlook tilt to the upside, and with the DXY continuing to trade north of both the 50- and 100-day moving averages, but waiting for that trade to pan out increasingly feels akin to watching paint dry.

Finally, just a brief word on crude, which remains as pressured as at any time in recent sessions, with front WTI still stuck below $60bbl. To be honest, I’m really scraping the barrel to find any reason for crude benchmarks to rally here, with OPEC+ still engaged in a war for market share, the market already vastly over-supplied, and with fresh demand risks from the latest tariff pantomime as well. This recent slick move lower looks likely to roll on for the time being.

LOOK AHEAD – It’s finally Friday!

A light docket lies ahead, especially given that we won’t be getting the latest US housing starts, building permits, import/export prices, or industrial production stats, owing to the ongoing government shutdown. Consequently, today’s only notable release will be final eurozone inflation data, and I can’t remember the last time that was a market mover.

As such, focus will likely remain on incoming tariff headlines, as well as another busy slate of central bank speakers, chiefly any final remarks that FOMC members seek to squeeze in before the pre-meeting ‘blackout’ begins at close of business.

Other than that, all there is to do is to warn of potential gapping risk over the weekend were any unexpected news to break, and to mull where may be a suitable venue to see in Friday night with a beverage or three.