Sun, Dec 04, 2022 @ 07:26 GMT
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Investors Catch Their Breath as Quarter Kicks Off on Positive Note

The new week, the new month and the new quarter kicked off on a volatile, but a positive note. European indices ended the session with slight gains, the SMI eked out a 0.23% gain, as Credit Suisse closed a very ugly session with 0.90% loss only. The shares recovered a slump up to 12% earlier in the session. The bank convinced investors that it has enough liquidity to survive and a solid restructuring plan to thrive. Washington Post wrote ‘No, Credit Suisse isn’t on the brink’, and that ‘disappointment is more likely than default’. Now, investors are holding their breath to hear more details about the bank’s restructuring plans that should be announced by the end of this month.

For now, we can all take a deep breath, and enjoy some positive vibes across the global financial markets.

European indices gained yesterday, while the US indices rallied. Futures point at bullish start on both continents.

The Dow Jones jumped the most on Monday, as oil stocks literally roared on the back of firmer oil prices.

Oil bulls are betting that OPEC will announce an output cut of around a million barrels per day to ‘stabilize’ oil prices.

It is also said that Saudi may be willing to build some reserves to compensate for the Russian oil as European cap on Russian oil price could lead to lower Russian output.

If the market mood remains ok-ish, we could see the oil prices recover toward $90, where stands the 50-DMA. But the global slowdown, and recession fears are never far, nowadays, and could cap the price rally.

Four factors should however give support to oil prices in the medium run

  1. The gas to oil switch increases demand for oil.
  2. The US will stop selling its strategic reserves,
  3. European measures to cap Russian oil price will likely hit the Russian oil output, and
  4. We have not heard more about a nuclear deal with Iran.

But despite all, I believe that we won’t see crude oil rally above $100 per barrel.

Bad-news-good-news pricing is good news

The US ISM manufacturing index showed that expansion in the US slowed faster than investors expected. Interestingly, the soft ISM gave a positive spin to the market.

I believe that this is an important sign that despite the Federal Reserve (Fed) officials’ strongly hawkish rhetoric, many investors no longer believe that the Fed could continue tightening at the current speed.

That’s a good ingredient for a global market rebound.

In the FX, the US dollar retreat almost 3% since its September peak. The dollar lost more than 4.50% against the Brazilian real, as the actual president Bolsonaro did better than expected in the Brazilian elections last Sunday. He will be confronting the leftist Lula in the second runoff, but Lula will most likely moderate his stance to pave his way toward the presidential seat.

The recent rally in pound sterling has also a finger in the dollar’s downside correction. Cable rallied past the 1.13 level, as the UK 10-year yield returned below 4% as… Liz Truss government took a ‘mini’ step back from their terribly unpopular fiscal spending plan, and said that they will not reduce taxes on big salaries

But still, the bearish bets against pound are at the historical high levels, and Liz Truss must do more to reverse the negative sentiment in the pound, and against the UK. Because yesterday’s U-turn on high earners will save the government £2 billion, while the rest of the huge ‘mini budget’ is still on course, and will continue pressure the UK sovereign bonds and the pound.

Happily, the Bank of England (BoE) also has its hands in the mud, and is buying sovereign bonds to help UK navigate the turbulent Truss waters.

But as Bloomberg put it so well, the BoE is trying to hit the brakes, while Liz Truss is stepping hard on the gas. So, it smells like the brakes started burning on the British truck. Half a million people signed a petition for immediate election in the UK, so instability is still the major topic in Britain.

Softening central banks?

Anyway, it’s still good to know that the BoE is there.

It is also encouraging for investors to see that the Reserve Bank of Australia lifted its interest rates by 25bp only, versus 50bp expected by analysts.

And it’s cautiously positive that US investors price bad-news-as-good-news. That means we start seeing some easing in central banks’ positions, and expectations.

Today, we will be watching the job openings data in the US, and hope to see a smaller number, as the Fed sees the job openings as a factor that could ease the pressure in the US jobs market.

Then, will follow the ADP report on Wednesday, and the NFP, unemployment rate and the wages growth on Friday. Investors are praying for softish numbers this week to continue the rally.

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