US Averts Shutdown, But Market Mood Remains Sour

Fundamental analysis of Forex market

The US government won’t be shut today, as Joe Biden signed a funding bill that should keep the US government agencies running until December 3rd. But that doesn’t resolve the whole debt ceiling issue, nor avert the risk of an eventual US default. Treasury Secretary Janet Yellen says that if the debt ceiling is not raised by October 18th, US may not be able to service its debt. And she wants to see the debt ceiling removed altogether, and indeed, if it is raised each time, it doesn’t mean anything, it doesn’t serve a real purpose except from leading to some heated discussions every now and then which finally end with a higher debt ceiling.

So, the short-term solution to the US debt ceiling issue should give a certain relief to US equity markets in the short-run, after the S&P500 finally couldn’t hold on for longer and gave in the 100-dma resistance to close the session a touch above the 4300 mark. As such the index ended the month of September some 5% lower, which was the worst month since the terrible March 2020 plunge. Now, we are just at the lower end of the 5-10% downside correction that the bearish call givers were looking for. Let’s see if the stopgap deal in the US could help the index rebound from the 4300 mark, or would the bears remain in charge of the market and carry on with a deeper downside correction, targeting the 200-dma support, which could mean another 3-3.5% drop in the index valuation.

Nasdaq on the other hand consolidates losses below the 15000 for the third day, but Netflix continues outperforming the tech space, partly thanks to the Korean show Squid Game that could attract more subscribers to the streaming platform in the weeks ahead. Netflix hit a fresh record yesterday, trading close to the $620 per share for the first time. But if the overall sentiment doesn’t improve, we shall see some consolidation and perhaps a downside correction from the actual levels.

Chinese Big Tech on the other hand remains on a free-fall pattern. Alibaba shares are now below the $150 level for the first time since May 2019, sees the latest wave of optimism abated. And the aversion of the US government shutdown will certainly not help the Chinese stocks getting their heads above water, as the Chinese government keeps punching from different and unexpected angles, and investors have had enough, for now.

Despite the US debt ceiling relief, US futures are in the red as Asian equity markets kicked off the new month on quite a negative note. We saw Japan’s Nikkei index plunge more than 2.5% overnight, as Australian ASX200 slid close to 2% on rising inflation fears, which would keep the central banks’ hands tied faced with a slower economic recovery due to the skyrocketing energy and commodity prices.

In summary, the high inflation is about to become a worst headache than the pandemic itself, as at least for the pandemic, central banks had tools to use. With this high inflation, they have nothing to do.

Now the traditional hedge for inflation, and a market rout has not shouted present in September decline in equity markets. On the contrary, the price of announce dived more than 6% during the month, proving once again that the yellow metal is no longer the dream hedge for inflation, nor a souring market sentiment

So speaking of inflation, Eurozone flash CPI estimate should print an advance to 3.3% in September from 3% printed a month earlier. Inflation Europe is on a rising path, as elsewhere in the world, but the European Central Bank (ECB) head Christine Lagarde stays firmly behind her supportive monetary policy despite a couple of nations within the Eurozone that get tenser with the rising inflation, such as Germany, Netherlands and Austria. Therefore, a sustained increase in European inflation, which seems inevitable looking at the exponential rise in European energy prices, should still revive the ECB doves and limit the losses we see in the single currency against a broadly stronger US dollar.

US on the other hand will reveal its jobs figures next Friday, after having posted at least three consecutive rises in the weekly jobless claims. We will talk about it in detail next week.

More globally, in FX, the currencies of hawkish central banks will likely outperform along with rising inflation pressures. So, we may see an extended period of softness in EUR, JPY and Swiss franc. Energy and commodity currencies on the other hand should stand up against a globally stronger US dollar. In this respect, we shall see a further advance in USDCAD towards the 1.30 level.

Speaking of oil, the upside pressure in oil prices seem to start easing as buyers become rare above the $75pb mark in US crude. An eventual downside correction could find support near the $70-72 range, as the global energy crunch will likely outdo any concerns of slowing demand due to the Covid worries, even less now that the 4th wave of Covid starts easing in many places across the globe.