Daily Market Outlook - Thursday, Dec. 7

By Patrick Munnelly of Tickmill

Thursday, December 7, 2023 7:50 AM EST

Cutout paper illustration representing scheme and Stocks inscription

Image Source: Pexels

Asia - Stocks in the region experienced a decline due to negative sentiment in the wake of weak labor data from Wall Street. Mixed trade figures from China, which showed an expansion in exports but a contraction in imports, also contributed to the subdued market. The Nikkei 255 was hit the hardest due to a stronger currency and higher yields trading below the 33K handle. The Hang Seng and Shanghai Comp. were somewhat varied, with the latter experiencing choppy trading due to mixed Chinese trade data. Moody's revision of its credit outlook for the special administrative region to negative caused the Hong Kong benchmark to suffer. The second reading of Japan's Q3 GDP data, which is set to be released tonight, is not expected to be revised. The initial data showed a surprise 0.5% contraction, leading to expectations that the Bank of Japan (BoJ) will continue to be cautious about raising interest rates. The BoJ's policy decisions are strongly influenced by economic data, and a contraction in GDP indicates that the central bank will likely focus on supporting economic recovery rather than tightening monetary policy in the near future.

Europe - The Q4 GDP figure that is due to be released in the Eurozone will be an update to previously released data. It is not expected to change the overall economic picture, as GDP is still predicted to show a small decline of 0.1% for the quarter. However, the release will offer more information and insights into the various components of economic activity. The recent October German industrial production data showed a decrease of 0.4%, marking the fifth consecutive monthly fall. This follows yesterday's unexpected signal of a significant decline in German factory orders, indicating ongoing pressure on the industrial sector. The Italian October industrial production data is also expected to reveal a decline. These indicators collectively suggest that the Eurozone economy is at best stagnant in Q4. Nonetheless, survey data provides some hope for a potential improvement in economic conditions in 2024.

US - Stateside, one noteworthy release that may draw attention in the markets is the US weekly unemployment claims. Although tomorrow's monthly labor market report will provide a more comprehensive update, the weekly claims serve as a timely indicator. Thus far, these claims have remained low, signaling that employment conditions continue to be robust. However, any indications of an upswing in unemployment claims will likely be closely monitored by markets, especially in the current bullish environment.

FX Positioning & Sentiment

The implied volatility of G10 FX options suggests an expected increase in FX realized volatility. Factors contributing to this include the recovery of the US dollar and the anticipation of potential volatility from upcoming data releases and central bank meetings. The one-week expiry implied volatility is elevated across major currency pairs, particularly in anticipation of the US jobs data scheduled for Friday. This volatility is expected to rise further on Thursday, reflecting additional risk premium ahead of next week's policy decisions from the US, UK, and eurozone. For example, the EUR/USD benchmark 1-month expiry implied volatility reached a new 6-week high of 7.0 on Wednesday, while one-month risk reversals indicate increased downside premium over upside strike premium at 0.4. In the case of AUD/USD, traders may consider FX hedging strategies, especially if AUD/USD is close to significant strike levels expiring on Thursday at 0.6545 and 0.6650. The USD/JPY one-month expiry implied volatility remains near recent highs, around 9.0, with trade flows favoring downside strikes. These indicators highlight the market's expectation of increased currency market volatility in the near term.

CFTC Data

The net speculative long position for EUR has increased, while the short position for GBP has been significantly reduced. On Tuesday, the net speculative long position for EUR rose to 143,165 from the previous week's 129,654. The net speculative short position for JPY also increased to 109,237 from 105,454. Additionally, the net speculative short position for AUD decreased to 71,219 from 77,970. However, the short position for GBP decreased significantly to 7,895 from 26,098. Furthermore, there has been an increase in short positions for CHF and NZD.