Daily Market Outlook - Wednesday, Dec. 6

By Patrick Munnelly of Tickmill

Wednesday, December 6, 2023 4:29 AM EDT

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Asia - Asian-Pacific stocks experienced widespread gains, driven by a more subdued yield environment, increased risk sentiment, and anticipation surrounding important data releases. The recent decline in US JOLTS job openings raised hopes for potential Federal Reserve rate cuts, further boosting the positive market atmosphere. The Nikkei 225 showed notable outperformance, surging and surpassing the 33K handle. This progress was supported by a decrease in the 10-year JGB yield, which reached its lowest point since August. On the other hand, the Hang Seng rose, aligning with the positive market sentiment. However, the Shanghai Composite had a more mixed performance, with the mainland market lagging behind. The nuanced dynamics were influenced by the ongoing liquidity drainage by the People's Bank of China and Moody's negative revision of China's credit outlook.

Europe - The Financial Stability Report of the Bank of England, along with a press conference, is expected to provide information on how the financial system is adjusting to the significant rise in interest rates since late 2021. While the BoE is likely to acknowledge a decrease in both the supply and demand of credit, it may emphasise that the overall financial industry is managing well without any major strains. The report's analysis of the housing market and the impact of higher mortgage rates will be closely examined, especially considering the growing optimism in the market regarding potential significant interest rate cuts in the coming year. Governor Bailey is not expected to give any hints about the upcoming monetary policy update.

The November construction data for the UK PMI will offer a timely evaluation of activity in a sector that is highly sensitive to changes in interest rates. The slight increase in the overall activity index from 45.0 in September to 45.6 in October, although still the second-lowest reading since May 2020, suggests some resilience. The weakest segment, housebuilding, has been consistently declining for 11 months, but there are signs of stabilisation in commercial activity despite a sharp decline in civil engineering.

For the Eurozone, preliminary data from major countries indicates a potential small increase in retail sales in October, which would be the first increase seen in six months.

US - Stateside, The ADP measure is a report that provides an estimate of the number of jobs added or lost in the US private sector. It is released two days before the official monthly employment report by the Bureau of Labor Statistics (BLS). The ADP report is based on payroll data from approximately 400,000 US businesses, and it covers about 24 million employees. While the ADP report is considered a useful indicator of the health of the US labour market, it is not always a reliable predictor of the BLS report. The BLS report is based on a much larger sample size and includes data on both private and public sector employment. Additionally, the BLS report includes a range of other labour market indicators, such as the unemployment rate and average hourly earnings. Despite its limitations, many economists and investors closely watch the ADP report as it can provide some insight into the direction of the labour market and the broader economy.

FX Positioning & Sentiment

The price of FX options has risen in the past week due to valid reasons. Both realised and implied volatility have increased as the USD has regained its previous strength. Implied volatility measures the risk of realised volatility and helps determine the premium. Option risk reversals have shown a preference for a higher implied volatility if the USD were to recover. Additionally, the upcoming US jobs data on Friday and the inclusion of the Federal Reserve, European Central Bank, and Bank of England in the one-week expiry implied volatility are also significant factors to consider.

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.