A look at the day ahead from Julien Ponthus.
‘Don’t fight the Fed’, goes the old saying.
Investors tempted to challenge the U.S. Federal Reserve’s narrative on transitory inflation might want to read Russell Clark’s final letter to investors while listening to the rock anthem ‘I fought the law’.
After another monthly loss at the hedge fund which bears his name, Clark decided to wind up his fund, deploring that global markets are increasingly driven by politics, notably China’s, for which he admits having no particular edge.
“U.S. markets are essentially a bet on the Fed unable to raise rates, and Congress unable to regulate big tech or raise corporate tax rates”, he wrote in his October newsletter.
Indeed, many hedge funds expected the Fed and other central banks to quickly turn hawkish and have been forced to cover bets when caught on the wrong side of the trade.
The impact of the 6.2% year-on-year rise in U.S. inflation in October on the Fed’s thinking has proven tricky to call as President Joe Biden weighs whether to keep Jerome Powell as chair for a second term or elevate Fed Governor Lael Brainard to the post.
Amid uncertainty on central banks’ next move, gold prices slipped this morning from a five-month peak.
Yields for 10-year U.S. Treasury notes are at about 1.55% while the euro zone’s benchmark, German 10-year yields is at -0.26%, highlighting how far behind the European Central Bank is in the tightening cycle.
At 95, the dollar index is close to highs unseen since July 2020 while the euro, by contrast, is trading at 16-month lows. The dollar’s strength has also weighed on oil prices.
Meanwhile, global equity markets are trading at a whisker from their record highs as Asian shares crept higher on Monday, boosted by positive Chinese economic data.
For their part, futures for European equities are just slightly in the red less than an hour ahead of cash trading.
Key developments that should provide more direction to markets on Monday:
– China industrial output, retail sales accelerate but property clouds outlook
– Japan’s economy shrinks more than expected as supply shortages hit
– India’s Oct WPI inflation accelerates to five-month high of 12.54% y/y
– UK Rightmove house prices
(Reporting by Julien Ponthus; editing by Saikat Chatterjee)
