Current market commentary
Lower than expected US inflation has led to an equity rally. Besides falling interest rates and a weaker dollar, the drivers were the low equity positioning of many investors. Tech stocks benefited from short covering, gaining more than 20% in some cases. The price increase was temporarily reinforced by hopes about China reopening its economy as well as better momentum and falling volatility, which led to a build-up of equities in trend-following strategies. Whether the year-end rally continues depends mainly on the next inflation print and the Fed's reaction to it in mid-December. If volatility continues to fall until then, more systematic strategies are likely to be pushed into the market. On the other hand, the strong outperformance of equities versus bonds since the beginning of the quarter is creating rebalancing pressure towards the end of the year. Consequently, the short-term upside potential is likely to be limited. In the medium term, corporate earnings should be the decisive factor for the direction of markets.
The next two weeks should be quieter. The major central banks do not meet again until mid-December and politically it will become exciting again on 15/16 December at the EU summit. On 24 November, the US stock markets are partly closed for Thanksgiving. There are many sentiment indicators due this week. On Wednesday, the preliminary S&P Purchasing Managers’ Indices (Nov.) for the eurozone, the UK and the US will be published, as well as US New Orders (Oct.) for Durable Goods and the US Consumer Confidence Index (University of Michigan, Nov.). The German (ifo) and French (Insee) business climate will follow on Thursday. The following week will see preliminary inflation figures (Nov.) for the eurozone, retail sales (Oct.) for Germany and ISM Purchasing Managers' Indices (Nov.) and Consumer Confidence Index (Conference Board, Nov.) for the US.
EUR/USD rate back above parity, but not yet a turning point
- As a result of the surprisingly "low" US inflation data, the euro has appreciated strongly. Investors now expect fewer rate hikes by the Fed. Accordingly, thedollar would lose relative attractiveness.
- Even if the euro seems undervalued in the long term in terms of purchasing power parity, the potential is likely to remain limited in the short term. For one thing, speculative investors are al-ready holding significant long positions, and for another, the monetary union is struggling with its very own problems, such as the energy crisis.