Morning Market Wrap
Overnight Markets:
U.S. cash markets experienced a second consecutive day of decline this week, extending the downward trend:
- SPX: -0.70%
- Nas: -0.88%
- Dow: -0.57%
During the night, stronger-than-expected ISM Non-Manufacturing numbers were reported, with a notable beat at 54.5 versus the expected 52.5. The Asian session saw USD strength, continuing through the night, with yields also rising, almost returning to the 4.4% high, closing the session at 4.296%, up nearly 20bps from Friday's session lows of 4.0596%. Oil also closed near highs at $87.58. These factors are headwinds for equities. I've been discussing this oil movement for about a week now, and if oil continues to rise, it could lead to concerns about a resurgence in inflation, which would pose problems for the Fed. A surging oil price is not conducive to controlling inflation.
Metals and Macro:
The macro environment is relevant to the commentary as it impacts the markets. Precious metals (PMs) experienced continued weakness overnight:
- Silver: -1.47%, closing at $23.18
- Gold: -0.5%, closing at $1916 USD
Again, the U.S. Dollar (DXY) strengthened alongside rising yields and against oil prices, putting pressure on PMs. While most people might say the market is down due to "risk-off" sentiment, it's not that simple. It's crucial to understand the drivers behind this "risk-off" situation. In this case, it's not purely "risk-off" but also about market structure, with the USD gaining strength, rising yields, and oil prices increasing—all contributing to fears of an inflation resurgence. This backdrop is unfavorable for PMs.
Base Metals:
Typically, when the USD strengthens in this environment, base metals come under pressure, as seen overnight:
- Nickel: -2.4%
- Copper: -1.48%
- Aluminum: Flat
- Tin: -1.02%
Energy and Battery:
Natural gas continued its descent, closing -2.4% at $2.52, nearing the lower end of its recent 4-5 month sideways trading range, with a low at $2.404. NEWC coal also experienced a decline, down 2.61% for the Oct contract, closing at 162. The commentary above has addressed oil.
Lithium Carbonate prices are closing in on recent range lows of 195CNY/kg. I've been mentioning the downside risks in lithium prices. Moreover, prices are persistently below the forecasts for this year, which could have several implications, including downgrades during quarterly and half-yearly reports in the coming 3-6 months. Smart investors are likely to anticipate this rather than waiting for it to happen, so it's essential to be aware of this risk.
I also want readers to be aware that tomorrow we will see the weekly price prints from carbonate and hydroxide tomorrow. SO be aware of that.
Iron ore continues to hold up well in China, maintaining these highs for about a week without significant changes. It's not rolling or breaking higher, so it's worth keeping an eye on. Iron ore closed at 849.5CNY/t.
Local:
Australian futures continued their weakness, down 35pts or 0.48% from the overnight session. With commodities lower and the USD gaining strength, it's understandable to see pressure on Australian equities. I'll be closely monitoring sectors that appear weak. However, it's important to note that market gaps and illiquidity around market opens can sometimes lead to overextended moves, sapping momentum from the short side. Take a look at the PLS chart—it shows how challenging it is for the market to move down and how rapidly it moves up. This inherent market structure is something to be aware of and a factor to consider when managing risk.
Data (Sydney Time):
There's no local data of note today. At 1 pm, we have China's trade balance. At 7 pm, the Eurozone will release revised GDP figures. US Weekly Jobless Claims are due at 10:30 pm. While these may not be considered highly risky events, we're currently in a period where even seemingly random data points can affect the markets. It's essential to remain cautious and vigilant in this environment.
That's all for today. Have a great day.