Stocks turn down ahead of the holiday period
* Nasdaq drops over 1.5% as US Treasuries keep powering on
* GBP gets hit as inflation slows more than expected raising rate cut odds
* ECB hawks warn against betting on imminent policy easing
* US consumer confidence jumps in December as outlook improves
FX: USD printed an “inside day” candle. This is where the whole of the day’s range trades inside the previous day’s and is a consolidation pattern. The focus is on yields with the 10-year Treasury making a new cycle low at 3.84% and losing support around 3.92%.
EUR gains have stalled just below 1.10. But markets believe the Fed is likely to cut rates ahead of the ECB next year. This is driving underlying support for the single currency. ECB officials also continue to caution against rate cut bets.
GBP dived after a much softer than forecast CPI for November. Declines were broad based, and services inflation also fell more than expected. Cable closed near its lows around support at 1.2628/9.
USD/JPY printed a tiny inside day below 144. The 200-day SMA is at 142.65, plus a long-term Fib level just below. Treasury yields continue to slide.
AUD made another five-month high but slid into the close. USD/CAD fell to more new lows after the recent sticky CPI data saw a bid to the loonie. But buyers stepped in above 1.33.
Stocks: US equities finally declined with conditions severely overbought. The S&P 500 lost 1.47% to settle at 4,698. This was the biggest one-day drop since September. The tech-dominated Nasdaq 100 finished 1.53% lower at 16,554. The Dow was down 1.27% at 37,082.There was no single catalyst, which could be the way over the holiday period as thin liquidity prevails. All sectors in the benchmark S&P 500 closed lower. Consumer staples were the worst performing sector weighed down by General Mills results.
Asian futures trade in the red. APAC stocks traded mostly higher after the record highs seen on Wall Street. The Nikkei 225 surged higher after the BoJ’s dovish press conference by Governor Ueda.
Gold struggled again at resistance around $2040. Price action was muted with yields lower but the dollar higher.
Data Review – UK CPI sees rate cuts bets flourish
Yesterday’s UK CPI data came in much lower than expected for November, with the headline rate dipping below 4% for the first time since October 2021. The fall to 3.9% from 4.6% appears to be broad based with discounting across the board. Crucially for the Bank of England, services inflation slid to 6.3% which is some way below the peak at 7.4% and the MPC’s recent forecast of 6.9%. This measure of prices is a key gauge for members of the BoE who set UK monetary policy and interest rates.
The Old Lady (the Bank of England) took a noticeably different approach to the Fed last week as they explicitly pushed back against the quantity of rate cuts priced into markets for next year. But markets have shifted their rate cut bets quite dramatically after this softer report. The first move is now seen in May with over 130bps of cuts priced into 2024.
Chart of the Day – Dollar Index consolidating near recent lows
The widely watched Dollar Index is made up of six of its key trading partners. While the JPY and GBP have similar weightings of around 12%, the euro makes up the lion’s share of the index with 57%. So, the chart is in some ways a mirror image of EUR/USD.
The index is currently tracking sideways just above the recent cycle low after the FOMC meeting at 101.77. A major Fib level (61.8%) of the summer rally sits at 102.54. Above here is the midpoint of that move at 103.46 and the 200-day SMA at 103.48. If prices lose the recent bottom, the next Fib level is 101.24.