Daily Market Outlook - Monday, Nov. 27

By Patrick Munnelly of Tickmill

Monday, November 27, 2023 6:45 AM EST

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Asia - At the beginning of the week, equity markets in the Asia-Pacific region were subdued due to geopolitical headlines dominating newsflow over the weekend. There was uncertainty over whether the Israel-Hamas truce would be extended beyond the initial four-day agreement. The Nikkei 225 wiped out its opening gains and participants digested Japanese Services PPI, which showed a slight acceleration. The Hang Seng and Shanghai Comp. declined due to soft Chinese Industrial Profits and concerns over shadow banking after Chinese authorities opened a probe into struggling shadow bank Zhongzhi. The PBoC's notice to strengthen financial support for private companies did little to spur risk sentiment. Overall, a quiet calendar added to the humdrum mood in the markets as the month-end approached.

Europe - The week begins with relatively subdued activity, with a focus on the CBI's November UK retail sector report providing insights into the sector's performance leading up to the festive season. The 'volume of sales' measure has consistently shown negative figures since May, likely continuing this month, resulting in high inventory levels for businesses. In the US, the October new home sales report is anticipated to reflect a decline in activity after a surprising surge in September, attributed to increased mortgage rates.

Later today, ECB President Christine Lagarde will address the European Parliament, emphasising the ECB's current stance of pausing to assess the impact of recent interest rate hikes, indicating a neutral position without a bias toward hiking or cutting in the near term. Overnight, ECB member de Cos and the BoE’s Ramsden will participate in a panel discussion hosted by the Hong Kong Monetary Authority (HKMA) and The Bank of International Settlements on 'Inflation, Financial Stability, and Employment'. On the domestic front, the British Retail Consortium (BRC) is set to release its November shop price index, with an expected decrease in the annual rate, further fueling expectations of ongoing declines in the broader UK CPI inflation measure in the coming months.

US - Stateside, after a period of quiet, the U.S. economic calendar is becoming more active. The release of the core PCE price index, which is the Federal Reserve's preferred measure of inflation, will be the most important event. The G10 central bank calendar will be dominated by the Reserve Bank of New Zealand's rate decision. The market is anticipating a 0.2% increase in the U.S. core PCE for October, which is a slight decrease from the previous month's 0.3%. Any deviation from this expectation could impact the Fed's projections. Additionally, the second estimate of Q3 GDP is expected to show a healthy 5.0% growth. Other data to be released includes ISM manufacturing PMI, final S&P Global manufacturing PMI, Chicago PMI, and a variety of housing data. Fed Chair Jerome Powell will also be speaking at a college event on Friday.

FX Positioning & Sentiment

The foreign exchange and options markets have experienced a period of tranquillity following the recent decline of the US dollar. However, the upcoming week, filled with various data releases, may usher in heightened volatility in realised FX rates, consequently supporting implied FX option volatility. The focal point will be Thursday's PCE data, crucial for confirming perspectives on moderating US inflation and potential rate adjustments. Key releases throughout the week include jobless claims on Thursday, new home sales on Monday, consumer confidence on Tuesday, GDP on Wednesday, and ISM data on Friday. Additionally, Europe's data releases and New Zealand's central bank policy announcement on Wednesday will contribute to local currency risk. Despite the relatively stagnant FX rates this week, the exceptionally low 1-week realised volatility measures do not align with the diminished implied volatility in very short-dated options. Conversely, benchmark 1-month expiry implied volatility is unlikely to rebound from its prolonged lows, primarily influenced by its post-Christmas expiry, rendering this date less appealing.