Daily Market Outlook - Wednesday, Nov. 15

By Patrick Munnelly of Tickmill

Wednesday, November 15, 2023 4:59 AM EST

Businessman, Internet, Continents

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Asia - stocks experienced an uptick as global risk sentiment improved. The catalysts for this positive shift included weaker-than-expected US Consumer Price Index (CPI) data, which led to a more dovish outlook from the Federal Reserve, raising hopes that the Fed might conclude its rate-hiking cycle. Additionally, the region witnessed better-than-expected Chinese activity data. The Nikkei 225 rose by 2.5%, and the Hang Seng saw a 3% increase. Chinese Industrial Production and Retail Sales surpassed expectations, contributing to the positive sentiment. Reports suggesting that China is contemplating CNY 1 trillion in new funding for the housing market further boosted investor confidence. Additionally, the People's Bank of China (PBoC) conducted its largest Medium-term Lending Facility (MLF) net injection in seven years. The confluence of these factors resulted in a favourable environment for Asia-Pacific stocks, reflecting the impact of global economic data and central bank signals on regional markets.

Europe - In the UK, the Consumer Price Index (CPI) inflation figures for October were released earlier today, revealing a significant drop in the headline rate to 4.6% from 6.7% in September. This represents less than half of the peak rate observed a year ago at 11.1%. The larger-than-expected decrease is primarily attributed to the exclusion of last year's increase in gas prices from the annual comparison. Core inflation, which excludes food and energy, also experienced a more substantial decline than forecast, falling to 5.7% from 6.1%. Policymakers will closely monitor the "stickiness" of services inflation, a key metric influencing monetary policy decisions. Additionally, a speech by BoE MPC's Haskel is scheduled for this evening.

In the Eurozone, it is anticipated that industrial production fell by 0.8% in September, confirming a fourth consecutive quarterly contraction and supporting the estimate of a 0.1% decline in overall GDP for Q3. Despite this, the November German ZEW survey brought positive news, showing a fourth consecutive increase in expectations. This raises hopes of stabilisation in the Eurozone's largest economy, providing a potential boost to the broader economic outlook for the region. The economic data from both the UK and Eurozone will play a crucial role in shaping policy decisions and market sentiment.

US - Stateside, The upcoming data from the United States today has the potential to reinforce the market's expectations for an early rate cut, especially following yesterday's weaker-than-expected Consumer Price Index (CPI) inflation figures. The forecast for October retail sales is flat, which is above market expectations for a decline. Additionally, the core rate is expected to have slightly increased. The New York Fed Empire manufacturing survey is also anticipated to remain weak in November. Collectively, this data supports the view that U.S. growth is likely to slow in Q4 after a robust Q3. In addition to retail sales and manufacturing data, the U.S. Producer Price Index (PPI) inflation figures, scheduled for release today, will provide insights into pipeline inflationary pressures. Analysing producer prices is crucial for understanding the dynamics of inflation and assessing potential pass-through effects into consumer prices. The combination of these data points will contribute to the ongoing narrative surrounding the U.S. economic outlook, monetary policy considerations, and market expectations.

FX Positioning & Sentiment

The USD put over call implied volatility discount has been appearing attractive, and holders of USD put options may have benefited from the post-CPI (Consumer Price Index) USD drop on Tuesday. The miss in U.S. CPI and the subsequent extended drop in the USD was not priced into overnight expiry options, rewarding owners as break-even points were easily surpassed. The lack of realised volatility in the foreign exchange (FX) market in recent weeks has been a factor weighing on implied volatility, leading traders to be hesitant in holding long volatility positions and risking the loss of premium. Despite the post-CPI drop, the U.S. dollar remains well within recent trading ranges. It may face challenges in extending its setback significantly without additional weak U.S. data or positive data from other parts of the world, keeping implied volatility subdued for the time being. Shorter-dated implied volatility has experienced further declines following the data release. However, one-week historic/realised volatility and fair value measures remain significantly below. Benchmark one-month implied volatility could potentially offer better value, as its values align more closely with past realised volatility metrics. Additionally, with December's key central bank policy decisions included in the one-month expiry, it may present a more comprehensive picture for traders evaluating options.