Eyes on FED and Earnings Reports!
After seven months of gaining, the stock markets declined in September to cool the markets. On the last days of the month also, the China Evergrande crisis, an increase of newly infected of Covid-19, higher inflation, supply chain worries, and the Federal Reserve’s plans for tapering helped the market bears. For October, US employment data and market sentiment will lead the market.
In September, we had some signals that FED, will start tapering this year, and normally it will end with earlier rate hikes as well. While August NFP numbers at 235K was not that much impressive, however ending unemployment benefits payment was the reason to hope more people will start looking after job. The same scenario repeated at the beginning of October with 194K payroll comparing with 500K expectations, while the unemployment rate fell to 4.8%. With all slowdown in hiring, the last three months average of 750K and lower unemployment rates, showing the good enough recovery to convince the FED to start tapering the asset purchases.
Let's see what we are expecting from October and the rest weeks before the next FOM meeting.
USD: Back in September, after signals and data that were telling us that FED can start tapering in 2021 and rate hikes in 2022, instead of 2023, the US dollar returned from under 92 mark, all way up above 94. Short correction at the beginning of October also, with increasing concerns in the Energy market and labor shortage, that both can increase the PPI and CPI as the result, again started encouraging the Market to support the bulls. At the same time, we have Bond yields in multi-month high and it is also supporting the higher levels. With the latest NFP data and unemployment numbers, still, we can count on less dovish policies to start before the New Year, which is expected to increase the US dollar against its crosses and DXY above 94.
For the rest of the month, CPI numbers (13th), PPI (14th), Retails Sales (15th), and initial numbers of Q3 GDP (28th) are the most important event and data to watch.
ٍEuro: The ECB In September announced that they will reduce the monthly amount of the PEPP program but was so short on details about the reducing volume. Another key point that we need to remember, as I mentioned in the last report also is the increasing gap between the ECB and others, especially FED monetary policies, that can put the pressure on Euro with carrying trading. In September, we had a higher risk in the market especially in the last days of the month, and because of Chinese real estate companies, which are still live and can increase the USD demand against Euro. After testing the numbers under 1.17 for the first time in a year in September, the downtrend continued under 1.1550 at the beginning of October. For October, still same risky environment as usual of all Octobers will stay with us in the market, while uncertainty in the Chinese market and new leadership in Germany also, will be other reasons to hold the pressure on Euro.
For the rest of the month, the German ZEW index (12th), Flash PMI (28yh), Monetary decision (29), Inflation & Q3 GDP (29th) will be the key events and data to watch closely.
Sterling: During the pandemic, GBP acted like a risk Scanner. As market risk increasing, Pound decreasing. Some of the same reasons that cause weakness in Euro, plus labor and material shortages that caused crazy tension in the energy markets in the UK with empty gas stations slowed the economic recovery and further weakened the pound under the key $1.36 level. UK and US labor markets had the same recovery path in the past months with increasing average earnings. With increasing prices and income, the UK government now plans to raise the taxes to help trim its pandemic budget deficit. For October, same as the US, in the UK also government’s furlough scheme to support jobs has ended and it is expected to be encouraged for people to start looking for a job to help the recovery going forward faster and boos the Sterling. On the other hand, supply chain and labor market challenges with ongoing risk sentiment in the market can hold the bears for a bit longer time.
For the rest of October, August GDP numbers (12th), Employment data (13th), Inflation number (20th), Retails Sales, and Flash PMI numbers (22nd) will be the most important market movers for the Pound.
Yen: As the market risk in September puts pressure on other currencies, in September increase the Yen demand. Especially in the second half of the month with China Evergrande’s ongoing concerns. However again the carry trade and faster rate raise in the US and UK than Japan can put the Yen in the Bid position, especially in October. After eight and seven months of increasing the stock markets in the EU and US, finally, they fall in September the eased, and it was also another Yen growth factor. Yen tested its seven-month high against the euro (¥128) and six-month high against the UK pound (149 ¥) but printed its second month of decline in a row against the US dollar (¥111). The same scenario continued at the beginning of October as well but found not keep the way, because market risk eased and demand of Yen as well. However, for the rest of the month, as market participants counting on higher inflation that can end with an earlier start of Hawkish policies, money flow from stock markets to the safe havens can again lift the Yen against its crosses.
On the data front, for the rest of the month, we have to watch the Trade balance (20th), inflation, and manufacturing PMI (22th), monetary decision (28th), Unemployment rate, and Industrial production (29).
CAD: September and the beginning of October were perfect for Loonie, especially after its weakness in summer. We finally passed the election and BoC also as one of the pioneer banks in the Hawkish policies, has cleared its decision, so the summer uncertainty decreased. At the same time, the sharp increase in oil prices was supportive of the Canadian economy and its currency. For October, as we are still waiting to see the higher price for Oil and more inflation in the market, bulls in the Canadian dollar chart can lead the way.
On the economic calendar and in the rest of the month, inflation numbers (20), Retails Sales (27), and August GDP numbers (29) are the main market movers for Loonie.
Gold: Higher Bond Yields and increasing US Dollar puts the Gold under pressure, and this is what happened in September as well. For now, we have some factors, that lifting the Gold price, and on the other hand, some other factors that put the Gold price under pressure, the ongoing war between these factors will clear the trends, while none of them have enough power to create a decisive trend. Overall positive economic data and rising inflation, both increasing the chance of Hawkish policies. Hawkish policies will increase the US dollar and puts the Gold under pressure, while at the same time Stock markets also will have a negative reaction to this policy in the short term. Decreasing stock markets, on the other hand, usually will be positive for Gold markets. So Gold market will fluctuate between these buy and sell factors. However, in the overall outlook, I have a positive outlook on the stock markets and believe even if we see a decrease in prices, it will be short-lived and just a correction, so the overall outlook for Gold is bearish.
For Gold, CPI numbers from EU, US, and China, Retail sales in the US, Earnings Reports, and the upcoming FED meeting on November 2-3 will be the main market movers.
Wall Street: As I mentioned in the beginning, we saw the correction, finally after seven months of increasing prices. The Dow Jones Industrial Average (DJIA) and Nasdaq Composite, both printed their weakest monthly change in 2021, while the S&P 500 lost 4.8%, testing its worst month since March 2020. After two years of violation of the theory of collapse in September, in both 2020 and 2021 again we saw the weakness. In October, more than everything, guessing the FED next policies and Earnings Reports will move the market. However, economic data as always will be important, we have to watch consumer spending, consumer confidence, and economic growth more broadly from the US and other developed economies. And as always Geopolitical factors also will be matter.
If we want to have an analytic outlook, economic data, inflation, and employment development factors telling us that we can count on Hawkish trend between the central banks, as RBNZ started and we have strong signals from BoE as well. For FED, despite the employment data, other indicators telling us that we can wait for the same tightening reaction from FOMC members from their coming meeting on November 2-3, which means that the overall outlook for the main indices is bearish.