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Rally continues as markets ignore risks

Fawad Razaqzada Fawad Razaqzada 14/10/2021
Rally continues as markets ignore risks Rally continues as markets ignore risks
Rally continues as markets ignore risks Fawad Razaqzada
The markets continued to exhibit risk-on characteristics in the first half of today’s session, following on from Wednesday. US index futures and European indices rose, with gains in tech shares and miners leading the charge. In FX, the US dollar fell further, as the pound and commodity dollars rallied. Bond yields eased off their recent highs in a welcome relief for precious metals. Gold closed in on $1800 and silver rose above $23. Copper and crude oil also extended their gains further.
 
The risk-on response is perhaps a sign that the reflation trade is back and that the market believes stagflation concerns are not justified. But are the markets underestimating the risks they face?
 
Some investors clearly expect the global economy to grow at a good pace despite facing high inflationary pressures stemming from supply-chain bottlenecks and surging energy prices. While that may turn out to be the case, I would still err on the side of caution as incoming macro data and company earnings might suggest otherwise. The supply bottlenecks could be more damaging to the global economy than the markets are expecting. The Fed and other central banks might have to tighten their policies faster than they would want to if inflation turns out to be NOT transitory, despite repeated suggestions from top officials at the Fed and ECB and others that this is going to be the case.
 
 
What’s more, there is the potential for a full blown emerging market currency crisis. We have already seen the Turkish lira hit record lows amid high levels of inflation and low economic growth. Despite the conventional wisdom of pursuing a tighter monetary policy stance when inflation is surging, the nation’s President Erdogan thinks otherwise as he is apparently more worried about economic growth than price pressures. In his latest attack on the CBRT, he has fired three central bank members by decree. The CBRT now has no opponents to interest rate cuts. This could keep the beleaguered currency under intense pressure.
 
Meanwhile currencies in some of the other emerging markets, especially those that import oil and gas, such as India, have also come under stress amid the energy crunch. Should energy prices rise further then you would think the global economy - and markets — might feel the impact of weakened demand from EM.
 
With the above risks in mind, it is worth keeping a close eye on the upcoming micro and macro pointers from the US:
 
  • Today we will see more bank earnings after JPMorgan kicked off the earnings season on a positive note on Wednesday. Today we will hear form Bank of America, Citigroup and Wells Fargo while Goldman Sachs will follow a day later on Friday.
 
  • On a macro front, we will have US PPI, jobless claims and crude oil inventories data to look forward to later. Then on Friday, we will have US retail sales, Empire State Manufacturing Index and UoM’s consumer sentiment and inflation expectations indices.
 
Although CPI came in a bit higher than expected on Wednesday, investors sold the dollar and Treasuries, buying stocks, crude oil and metals. That trend has continued so far in today’s session. Whether we will see a reversal in the risk-on trade remains to be seen and will depend at least partially on the above macro events. If we get more evidence that points to rising consumer inflation expectations and/or negative sentiment towards the economy, this will provide some hard evidence about the risks that might lie ahead - and prompt investors to proceed with extra care.
 
spxSource: ThinkMarkets and TradingView.com
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Meet our contributors
Fawad Razaqzada
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Fawad Razaqzada
Market Analyst, London

Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms. He leverages years of market knowledge to provide retail and professional traders worldwide with succinct fundamental & technical analysis. Fawad also offers trading education to help shorten the learning curves of developing traders.
 
His colleagues consider him an expert at reading price action on the charts. This together with his deep understanding of economics and fundamental analysis, and trading experience, puts him in a great position to forecast short term price movements. Fawad covers a wide range of markets, including FX, commodities, stock indices and cryptocurrencies and his comments are regularly quoted by the leading financial publications such as Reuters and Market Watch. In addition to ThinkMarkets, Fawad also provides analysis and premium trade signals on his own website at TradingCandles.com.
 
 

Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Kearabilwe
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Kearabilwe Nonyana
Market Analyst, South Africa

Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives. His career in the financial markets has seen him hold various positions in global investment banks and global CFD and Spread betting firms. He has deep interest in using quantitative methods to help him understand and teach the fundamental drivers of asset prices.
 
 
 

Fawad Razaqzada
Fawad Razaqzada
Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms.
Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Kearabilwe
Kearabilwe Nonyana
Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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