Daily Market Outlook -Thursday, Nov. 2

By Patrick Munnelly of Tickmill

Thursday, November 2, 2023 5:13 AM EDT

Asia

Markets rallied, with both shares and bonds gaining, following comments from the Federal Reserve indicating a potential halt to interest rate hikes and even the possibility of rate cuts. Japan's Nikkei share average surpassed the psychologically significant 32,000 mark for the first time in two weeks. This surge was driven by market expectations of an end to the Federal Reserve's tightening of monetary policy and a peak in U.S. bond yields. The Nikkei's 225 components had a mixed performance, with 136 rising, 88 falling, and one remaining flat. In China, the blue-chip Shanghai Composite index dipped by 0.2%, while Hong Kong's Hang Seng index saw a notable 0.9% increase. The non-committal stance of the Federal Reserve chief led investors to strengthen their bets on a pause in the interest rate hike cycle and the possibility of rate cuts, contributing to the positive market sentiment.

Europe

Today, all eyes turn to the Bank of England (BoE) meeting. The market has minimal expectations of the central bank raising the Bank Rate from its current 5.25%. Nevertheless, this meeting still carries event risk, especially from the perspective of the British pound. Market participants will be closely scrutinising the BoE's latest macroeconomic forecasts and listening to Governor Andrew Bailey's press conference for insights into the future of UK interest rates. There are scheduled appearances by key ECB (European Central Bank) officials, including Edouard Fernandez-Bollo, Isabel Schnabel, and the Chief Economist Philip Lane. These appearances are likely to involve discussions, presentations, or statements related to the ECB's monetary policy, economic outlook, and other relevant matters.

US

Stateside, data docket is scant following the FOMC, the outcome of the meeting aligned with expectations as the Fed kept its key target range at 5.25-5.50% for the second consecutive meeting. The meeting statement itself did not contain any surprises. In his post-meeting press conference, Fed Chair Powell did not provide any new guidance. He maintained the option to raise rates if necessary. Market reactions included a decline in US Treasury yields. These yields had already been falling due to a weaker-than-expected manufacturing ISM report. After the Fed's announcement and press conference, the 10-year Treasury yield dipped below 4.8% and approached 4.7%. Attention now shifts to Apple earnings this evening ahead of tomorrow’s Non Farm Payrolls report.

FX Positioning & Sentiment

Revised expectations for U.S. interest rates are poised to influence foreign exchange markets significantly. The likelihood of another U.S. rate hike has considerably reduced, with odds of a hike currently standing at just one-in-three in January 2024, and one-in-five in 2023. There has also been a shift in the expected timing of the first rate cut, moving to June from July. While the timing has changed, the total amount of expected easing in the coming year remains relatively consistent at 97 basis points. Emerging market currencies have rallied in response to the Federal Reserve's recent stance, and this trend may continue to gain momentum in November. A swift shift away from the U.S. dollar could gather pace, further impacting FX markets in the coming weeks.

CFTC Data As Of Oct. 27

USD net spec long up a touch in Oct 18-24 period; $IDX rose 0.03% in period
Since period closed ECB dovish hold & Japan CPI may moot period adjustments
EUR$ +0.12% in period, specs -2,843 contracts; weak growth trump inflation
$JPY +0.05%, specs +3,029 contracts now -99,629; pair hovers near 150
GBP$ -0.16% in period specs -18,636 contracts; dovish BoE rate view weighs
AUD, NZD net spec short grew amid low rates, growth view; weak China growth
$CAD +0.67% in period, weak glbl growth and stagnant BoC rates weigh
BTC +18.2% period, specs sell 781 contracts flip to short, BTC steady since
End of developed mkt hikes and global growth remain key determinants ( Source Reuters)