When uncertainty is high…

Thoughts of the Day

The goal of trading is profit, not just participation. High uncertainty implies a need to reduce portfolio risk. Taking risks during uncertain times is akin to gambling, reliant on luck. Therefore, minimizing risk is prudent.

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Day Ahead

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What Happened Yesterday

Market Movements as of New York Close 19 Oct 23
  • Fedspeak:
    Logan (current voter, known hawk):
    “there has been some “welcome progress” in tackling inflation but that it’s still too high. Not yet convinced we are moving to 2% inflation.”
    (Logan was neutral previously and hawkish before that. This message sounds slightly hawkish.)
  • US Initial Jobless Claims for the week ending on 14 Oct was 198k (vs 212 k expected), lower than 211k the week before (revised from 209k). The Continuing Jobless Claims for the week ending on 7 Oct rose to 1,734k (vs 1,710k expected) from 1,705k (revised from 1,702k) the week before.
  • Japanese inflation rate fell to 3.0% in September from 3.2% in August, the lowest print since September 2022. Core inflation rate dropped to a 13-month low of 2.8%, slightly above consensus of 2.7% from 3.1% the month before. Reaction in the USDJPY pair was muted.
  • The US Treasury Yield curve inversion narrowed drastically to 0.16% as the US 2-year bond yield fell -0.05% to 5.14% while the US 10-year bond yield rose +0.07% to 4.98%. The US 10-year yield rose above 5% to a high of 5.001% intraday, the highest level seen since 2007. 
  • The US stock futures traded lower through the Asian trading session as the weaker sentiment from the day before spilled over with the S&P 500 futures falling -0.60%. However, we saw some relief when the London trading session started, allowing the S&P 500 future to bounce +0.58% from the lows before the New York session started.
  • The US stock market had a volatile day as traders digested Powell’s speech at the Economic Club of New York Luncheon with the market grinding higher through the speech and eventually falling lower on the day on the back of higher US yields. Consequently, the S&P 500 closed the day lower at -0.85% (high: +0.58%, low: -1.04%), the Dow slipped -0.75% (high: +0.56%, low: -0.88%) while the Nasdaq fell -0.85% (high: +0.77%, low: -1.07%).
  • The crypto market traded higher on the day due to Powell’s lack of indication of more rate hikes. Bitcoin is up +1.42% on the day while Ether eked out a +0.26% gain.
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Headlines & Market Impact

Powell says inflation is still too high and lower economic growth is likely needed to bring it down

Notable Snippet: Federal Reserve Chairman Jerome Powell acknowledged recent signs of cooling inflation, but said Thursday that the central bank would be “resolute” in its commitment to its 2% mandate.

In a widely anticipated speech delivered to the Economic Club of New York, Powell evaded committing to a specific policy path but gave no indication that he was leaning toward a push higher for interest rates.

“Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said in prepared remarks. “We cannot yet know how long these lower readings will persist, or where inflation will settle over coming quarters.”

“While the path is likely to be bumpy and take some time, my colleagues and I are united in our commitment to bringing inflation down sustainably to 2 percent,” Powell added.

Powell said he doesn’t think rates are too high now.

“Does it feel like policy is too tight right now? I would have to say no,” he said. Still, he noted that “higher interest rates are difficult for everybody.” Powell also said that significant tightening in financial conditions with higher bond yields can have implications for the policy.

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Big banks are quietly cutting thousands of employees, and more layoffs are coming

Notable Snippet: The largest American banks have been quietly laying off workers all year — and some of the deepest cuts are yet to come.

Even as the economy has surprised forecasters with its resilience, lenders have cut headcount or announced plans to do so, with the key exception being JPMorgan Chase, the biggest and most profitable U.S. bank.

Pressured by the impact of higher interest rates on the mortgage business, Wall Street deal-making and funding costs, the next five largest U.S. banks have cut a combined 20,000 positions so far this year, according to company filings.

“Banks are cutting costs where they can because things are really uncertain next year,” Chris Marinac, research director at Janney Montgomery Scott, said in a phone interview.

Job losses in the financial industry could pressure the broader U.S. labour market in 2024. Faced with rising defaults on corporate and consumer loans, lenders are poised to make deeper cuts next year, said Marinac.

“They need to find levers to keep earnings from falling further and to free up money for provisions as more loans go bad,” he said. “By the time we roll into January, you’ll hear a lot of companies talking about this.”

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Biden to seek billions in military aid for Israel as invasion of Gaza nears

Notable Snippet: President Joe Biden on Thursday asked Americans to spend billions more dollars to help Israel fight Hamas while Israel’s defence chief told his troops to be ready to go into the Gaza Strip to destroy the Palestinian militant group.

Biden said he would ask Congress on Friday to approve extra funding for Israel. A source familiar with the matter earlier said it would total $14 billion.

The money would “sharpen Israel’s qualitative edge” and strengthen its military capabilities, Biden said.

He said America’s national security required it to support “critical partners” like Israel. “It’s a smart investment that’s gonna pay dividends for American security for generations,” Biden said.

On the ground in the Gaza Strip, Israel appeared to be getting closer to a full-scale invasion of the seaside enclave ruled by Hamas. The Israeli military massed troops and equipment near the Gaza border.

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Phan Vee Leung
CIO & Founder, TrackRecord