US Close- stock rally continues, US manufacturing activity contracts, oil lower, gold steady, Asia in focus, PM Sunak, ethereum gains

US stocks rallied as momentum builds on calls that the Fed will be tapping the tightening brakes after next week’s policy meeting and ahead of mega-cap tech earnings. No one wants to aggressively buy big tech stocks until we hear this week’s big earnings from Apple, Alphabet, and Amazon.  Investors are getting more confident that inflation will soften as the consumer rethinks massive purchases.  Fed rate hike expectations will remain volatile, but expectations are growing that a weaker economy will let the Fed pause their tightening after the February policy meeting. 

Flash PMIs

The flash PMIs showed significant weakness across both the service and manufacturing parts of the economy, which is good news for investors expecting the Fed to pause early next year. The flash manufacturing PMI dropped to the weakest levels since mid-2020. Barely testing contraction territory is still a big deal as demand softens and further pain is widely expected.  The US economy is making its way to a recession, but it won’t be a steady decline as large parts of the economy still have strength. 

Oil remains volatile

Crude prices remained volatile as energy traders digested a steady stream of flash PMIs that showed global manufacturing is contracting. The short-term crude outlook has been heavy mostly on European weakness and China’s COVID woes, but now the US outlook is softening very quickly. 

Oil might struggle over the short-term as Europe enjoys warm weather, the strong dollar trade that is not going away anytime soon, and as the global outlook quickly deteriorates.

Gold

Gold is off to a slow start to the trading week as the dollar remains supported abroad after mixed data from China painted a picture of an economy that was not on solid footing. Despite today’s weakness, gold has dodged a bullet as the $1620 level held as Wall Street starts to lean towards pricing in a downshift in Fed tightening at the December policy meeting.  Gold traders are buckling in for a bumpy ride as this week’s risk flows will be determined by some heavyweight earnings and from a couple massive rate decisions from the ECB and BOJ.     

China

The conclusion of China’s Party Congress and release of economic data did not bolster confidence in Asia.  It was heavily expected for this Congress to deliver economic and political stability for the next five years, but it hardly impressed financial markets. 

Now that the Congress is over, it is time for the delayed economic data.  The key takeaway from Q3 GDP and a swathe of factory, retail, and trade data, was that the recovery is not yet on solid footing. 

It seems China is going to struggle with COVID a little longer and the strong rebound might not take hold until another couple quarters. 

BOJ

The Bank of Japan (BOJ) policy meeting is a do or die moment for the Japanese yen.  With the Fed policy meeting happening next week, they might have some reservations going all in.  If Japan wants to defend the yen, they might need to continue to intervene in the FX market and to adjust their yield curve control. 

The start of the trading week was filled with excitement as Japan appears to have again entered the FX market.  Officials are remaining quiet, but it seems clear they are trying to defend the yen before both the BOJ meeting later this week and ahead of next week’s FOMC decision. 

UK

The second time was the charm for Sunak as he is now set to become the next prime minister.  There was no need for votes after his sole competitor, Penny Mordaunt dropped out. Sunak now has a very short period of time to survive the global energy crisis, avoid fiscal chaos, and outline a credible growth plan. 

Crypto

Cryptos traded mixed as Bitcoin softened towards the $19,000 level, while ethereum gained more buzz as their supply seems to finally be decreasing since the Merge.  Bitcoin remains stuck around the $19,000 level and that will probably remain the case until we get beyond next week’s FOMC policy meeting.  

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