1 Minute Market Rundown – 27th October 2022

Bad News is Good News?
Asian Intervention Continues
(Another) Fed Pivot
ECB, will they crumble again?

‘A little bit for everyone’ has been the story of the markets this week. DXY has pulled back 4% off its highs on the back of scaled back rate hike expectations and Asian FX intervention, while ‘bad news is good news’ for equities as big misses in tech earnings has driven SPX higher. Where to even start?

Dollar exceptionalism has been the narrative of 2022, but there are hints that the tide could be turning. In some ways it’s been a perfect storm that has plagued the dollar this week: the BOJ are confirmed to have intervened again on Monday morning in their defence of the Yen, while China took the opportunity to follow suit. An unexpectedly dovish Bank of Canada fuelled pivot speculation when they surprised with a 50bps (market expected 75bps) rate hike, and poor tech earnings and housing data out the US could be the first signs of softening economic data – forcing Powells hand if Fedwatch probabilities are to be believed. DXY and equities have been inversely correlated all year and the move has followed through with SPX putting in its biggest earnings week move since 2011 (4.7%). The cause and effect here is two ways though. The inability of equities to fall on the back of a collapsing Hang Seng index and poor earnings will have short sellers nervous.

Let’s look forward though. The Fed has indicated, via minutes and its mouthpiece at WSJ, that it could no longer be a one-variable (inflation) reaction function, with spillback effects balancing the case for aggressive rate hikes. Could we see a downshift in Fed narrative this early though? Until we see something break, I doubt it. The mandate is clear (and not concerned by earnings) – control inflation and manage employment. This is the third time the market has second guessed a pivot and the result has always been the same – betting against the Fed is a negative EV trade. The simplest expression of this view is normally the best (Occam’s trade?), but I’m going one further here – DXY has many crosscurrents with current market intervention and GBP/USD is pointing up to me on rate-differential fundamentals and unwinding of political risk. Short equities is an option but always a horrible trade with bear market rallies being so hard to fade. Long vol/VIX into FOMC is my preferred expression: VIX has collapsed to 27 in a 95th percentile move given earnings reports and gives exposure to an equities pullback and any persistent tail risk. The concern here is Apple and Amazon materially over-performing and kick starting the bull case and if I’m honest, max pain for the market is to the upside here.

The instrument I’ve omitted to comment on so far is EUR. The ECB announce their rate hike today. The market has really ramped up terminal rate expectations for EUR and I do wonder where EUR/USD would be if it wasn’t for that. EUR/USD upside move this week has been in sympathy with GBP/USD for me and less based on fundamentals. With net positioning now long, there is a lot of downside pain still to be had on any sign of dovishness. EUR crosses are an attractive short in this situation, particularly EUR/JPY.

Crypto is the boring child of the family and any adrenaline seekers are off trading long dated bonds (of course). BTC is back above 20k as risk sentiment has improved. ETH has been the catch up trade after lagging an 11% move up in Nasdaq, but has come unstuck at its $1,585 trendline (one year timeframe). The micro story will always play backup to macro narrative though and any further legs up will need to be confirmed by the broader market.

As always, good luck out there!

James Laidlaw – OTC Trader

1 Minute Market Rundown – 27th October 2022

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