Espresso Morning Call: Massive risk rally continues, for now

What we are looking for

• USD remains corrective, for now: There was a huge swing back higher for major forex against the USD yesterday. The USD remains under corrective pressure this morning. However, with key levels approaching, the USD correction is already reaching a crucial crossroads.
• GBP volatility remains high: GBP is being bashed around with the broader market moves, but also with added political volatility and speculation in the UK. The uncertainty surrounding the UK Government and its fiscal position will sustain volatility in the days to come. 
• Indices rebound strongly: European indices are following Wall Street higher. US futures are adding further gains too. Near-term momentum remains positive, but with little change to the fundamental backdrop, there are questions about how far this move can sustain.
• Commodities looking more cautious: Precious metals rebounded yesterday but the move is less decisive and looks cautious this morning. Oil rebounded too and is also in a holding pattern this morning.
• Data traders: There will be two big USD risk events today. Firstly, US Retail Sales and then the prelim Michigan Sentiment.

Overview

Another hotter-than-expected print on US CPI inflation initially sent markets into a tailspin of risk selling and USD strength. However, a massive intraday turnaround on Wall Street seemed to be the trigger for a risk recovery. There is little to attribute to the move. However, suggestions of short-covering (taking profits on index puts) seem to have been at least some of the cause. This drove a correction in the USD and commodities to rebound. 

However, there is little change to the very worrying fundamental backdrop. The Fed will continue to be aggressive in its monetary policy and this will weigh heavily on the global economy and major assets. This rebound looks to be a knee-jerk move. This type of rally can retain momentum and there is a continuation this morning. However, built on shaky ground, they tend to falter and selling is likely to resume at some stage soon. It seems as though it is only a matter of when.

There are a couple of important tier-one US announcements for the US on the economic calendar today. Firstly, core US Retail Sales are expected to continue to decline in September. Michigan Sentiment is however expected to improve slightly in October. This is expected to be driven by improvements in both current conditions and expectations. However, after the latest hot CPI print, the Fed will be watching whether the Michigan survey shows consumer inflation expectations also increasing. 

Today’s news

Market sentiment recovers, for now: Risk appetite has continued to rebound from yesterday’s remarkable recovery. However, already the USD is clawing back against EUR and especially GBP. The sentiment rebound may not last long.

Treasury yields are slightly lower: Yields fluctuated yesterday in the wake of the CPI and then risk rebound. They are slightly lower this morning.

China inflation increases as expected: The CPI increased to 2.8% in September, which was in line with the consensus forecast. A reduction in the PPI to +0.9% (from 2.3%) was slightly lower than the +1.0% expected. 

UK political upheaval and speculation continues: The political outlook in the UK remains highly uncertain and full of speculation. Suggestions of a massive u-turn from the government on its shambolic “mini-budget” continue. Chancellor Kwarteng has returned to London a day early from the IMF conference in New York to try and salvage something from the mess. It is unclear what the fiscal outlook for the UK will look like in a week, or whether he still has a job.

Cryptocurrencies rebound with risk: As risk appetite staged a remarkable recovery yesterday, so did crypto. They are continuing the move this morning. Bitcoin is +1% at $19600 with Ethereum +2% at $1319.

Economic Data:

• US Retail Sales (at 12:30 GMT) Core sales (ex-autos) are expected to decline by -0.1% MoM in September (after falling by -0.3% in August)
• Michigan Sentiment - prelim (at 12:30 GMT) Prelim sentiment is expected to improve slightly in October to 59.0 (up from a final 58.6 in September)

Major markets outlook

Broad outlook: A risk recovery continues. The big question is for how long. 

Forex: GBP is the main underperformer today. USD is weaker against the commodity currencies but is already showing signs of stabilising. 

• EUR/USD has posted a bullish engulfing candle and left an important low at 0.9630 as the move has rebounded. Reaction today could be key now, as already the move is stalling. There is resistance around 0.9815 initially that is preventing a rebound into the old pivot area between 0.860/0.9950. With ongoing negative configuration on momentum, we continue to favour selling into strength. We are watching this lack of followthrough today as a potential warning of a false bullish signal.
• GBP/USD has rallied sharply in the past two days, leaving growing support around 1.0915/1.0925. The rebound has hit the barrier of a two-month downtrend and is just shy of the resistance around 1.1400/1.1500. With the RSI back around 50 already the move is showing signs of stalling this morning. With momentum indicators negatively configured rallies are seen as a chance to sell. 
• AUD/USD spiked lower yesterday but a sharp intraday rebound formed a bull hammer candlestick. The pair is now in recovery mode and a rebound towards the top of the one-month downtrend channel and resistance at 0.6360/0.6390 could be seen. However, we favour using this rally into resistance as a chance to sell. We wait to see this rebound plays out first though. Initial support is at 0.6285.

Commodities: The recent sell-offs on precious metals are still consolidating with a minor tick higher in oil.

• Gold has swung around sharply in the past 24 hours, but the resistance band at $1680/$1690 remains a key barrier. With the market struggling to take upside momentum this morning, we continue to favour using near-term rallies as a chance to sell. Another move lower to break below the $1659/$1660 support opens $1641 again. 
• Silver has fluctuated in the past 24 hours, as several major markets have. However, the intraday rebound yesterday has failed to decisively continue this morning. There is resistance at $19.30 which is a barrier to gains now which adds weight to the growing medium-term pivot at $19.90/$20.00. If $19.30 cannot be quickly overcome we favour the downside for likely further pressure towards $18.45 again. Below support at $18.50/opens $17.95.
• Brent Crude oil stopped a run of negative candles with yesterday’s rebound. We are mindful of what looks to be a pivot around the $93 area, with the market holding above here now. This also coincides with 50 on the RSI. This lends a mild positive bias, for now. However, a break under $93 would sour the outlook again.  Initial resistance at $95.90/$97.25 is protecting $99.50.

Indices: Selling momentum may have eased, but a negative bias remains on US futures. This is also a weight on European indices.

• S&P 500 futures a false downside break resulted in a massive rebound from 3501 to complete a huge bullish key one-day reversal. The move needs to now be sustained. There is room for a continued near-term recovery with the first real resistance around 3820. However, we remain cautious of backing near-term rallies as they are counter-trend and are likely to be short-lived.
• German DAX has posted a huge bullish key one-day reversal to swing the market into a near-term recovery. However, the move is now into the big long-term overhead supply between 12375/12700. The rebound needs to quickly move above 12700 otherwise selling momentum could quickly resume. The RSI is back around 50 again. There is some scope for the rebound to continue but the reaction to the resistance around 12700 will be key.
• FTSE 100 posted a big intraday rebound to form a bullish candle (arguably a bull hammer). This has left support at 6705 as the market has swung higher. There is resistance initially around 6955/7000 to get through and if so then a more considered recovery can take hold. Resistance at 7105 is key near-term. There is room for a rebound on the RSI but we remain mindful of the negative medium-term configuration and that rallies are seen as a chance to sell.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.