Equity bulls eye a comeback amid Fed and geopolitical uncertainty

Stock markets seek direction 

Following a tense week, with the US midterm elections confusing investors and Wednesday’s unfounded euphoria evaporating quickly, all eyes remain on US equity indices, and particularly the Nasdaq 100. The technology-dominated index has completed four consecutive weekly declines, severely underperforming most other major equity indices both in the US and abroad. 

The first step for the bulls is to gradually regain the upper hand, minimizing the chances of a repeat of last Thursday’s drop, laying the foundation for an upleg. It is worth highlighting that technology stocks have been under pressure since early October, so the results of the midterm elections have just accentuated the already negative sentiment.

A reversal of the current bearish sentiment needs a positive momentum buildup. However, there are still clouds on the horizon. Specifically, Friday’s impressive nonfarm payroll increase highlighted the currently strong US labour market conditions. While stocks need strong US growth and a positive trade environment – the decision by China to maintain the 10% excise on US imports but once again postpone an additional 24% tariff is undeniably positive – the latest data have boosted the chances of another 25bps Fed rate hike in December. Higher funding and borrowing costs are one of the reasons for the current stocks’ rout. 

Meanwhile, the Nvidia CEO’s affair with an alleged Chinese spy has added another twist to the current sentiment, potentially threatening Huang’s future at the helm of Nvidia, and even the company’s future ability to supply Chinese hyperscalers. If one adds the growing expectations for greater oversight and potentially more restrictive legislation from the Democrats, now controlling Congress, then the weakening Anthropic valuation from $2trn down to $1.25trn could be easily explained. 

Focus on geopolitics 

Risk appetite is obviously dependent on developments in the Middle East and the Russia-Ukraine conflict. The preparations for the two-day talks in Abu Dhabi, starting tomorrow, continue, with Europeans also taking part in the discussions, but the agenda has yet to be finalized. This means that headlines over the next two days could affect market sentiment.

With the rumours about another US military operation after the midterm elections proving false, indirect US-Iran talks continue, but there is no breakthrough. Iran’s preconditions for a truce have been known since the summer, but these cannot be accepted by the US, which means that at some stage, the US President will have to make a tough decision. Oil prices are hovering around $90, maintaining the solid decline in November, with the 200-day simple moving average (SMA) acting as a floor. Positive news from the Abu Dhabi talks could push oil below the $88.60 level, although such a move would prove short-lived if rhetoric regarding the Middle East turns negative once again.

Slow start to data week

Chinese inflation kicked off a less exciting week in terms of data releases, amidst another initiative to help China’s troubled stock markets, with CPI decelerating but PPI accelerating. Today’s light data calendar opens the door to central bank speakers, with Fed Board member Bowman, Chicago’s Goolsbee and Richmond’s Barkin most likely adding a dovish flavour to recent Fedspeak, while BoE Governor Bailey could try to control rate hike expectations after last week’s hawkish move. With the first Treasury auction of the week taking place today – $58bn of a new 3-year note will be offered – the focus is firmly on Tuesday’s US CPI report. 

Finally, the positive short-term correlation between gold and bitcoin has weakened lately. While gold is fighting tooth and nail to maintain the post-midterm election gains threatened by bouts of dollar strength, bitcoin has returned to the $74k area. The Binance hack, the AI-related stock weakness and, mostly, reports that Democrats are planning to increase pressure on crypto exchanges about Trump’s cryptocurrency dealings are starting to jeopardize the mid-August rally from the $62k area.