Sep 29, 2022 9:40 AM +05:00
VOT Research Desk
Key Insights and Analysis
Talking Points for the S&P 500, FTSE 100, GBPUSD, VIX, EURUSD, and USDCNH:
The View from the Market: Bearish USDJPY below 141.50;Gold Bearish Below 1,680
The Bank of England announced that it would buy unlimited bonds to stabilize its system in response to the sharpest rise in long-dated Gilt yields in over half a century. The S&P 500 recovered from its six-day decline thanks to the UK’s potentially massive commitment to its economy, which is the sixth largest in the world. But will this move last…
A Risk Assessment Powered by Stimulus: S&P 500 and FTSE 100: What are the necessary steps to recoup the markets from their overall decline in 2022? Massive and unconventional monetary policy, it would appear. The Bank of England (BOE) intervened during this session to address the financial distress in the UK financial system caused by last week’s “mini budget.”The imminent energy crisis, the central bank’s commitment to fight inflation with higher rates, and the warning that the economy may already be in recession all put the UK under pressure.
The already troubling decline in local capital markets and the local currency intensified sharply following the new government’s policy mix announcement last week, and it began to engulf global markets. Markets were willing to accept some of the transferred responsibility of the previous decade as a result of what appeared to be a “central bank put” returning to the headlines. The rally was fairly broad, but the S&P 500’s biggest rally in seven weeks seemed to put an end to the longest session decline (six) since February 2020, when the pandemic was at its height.
This past session saw a remarkable spread in the rebound in risk assets, but core performance was dominated by the UK benchmarks. Technical traders and market observers alike are drawn to the FTSE 100’s reversal from intraday lows for the local capital market. It wasn’t hard to figure out what the tide-changing update was and when it happened this session.
A significant market event was the BOE’s promise to balance out the government’s allegedly questionable fiscal policy plan (which they will have the opportunity to elaborate on in the medium-term report on November 23).The central bank said on Monday that it would hold off on plans to start selling its holdings of government debt and would instead commit to buying a small number of long-dated bonds in the near future. The news appeared to be precisely timed in relation to technical indicators from the UK’s FTSE 100.A daily “tail” that corresponds to the swing lows in the 6,800/6,6840 area back in April 2021 was produced by the index’s sudden reversal.
The Implications of a Relent from the Fourth Largest Developed World Central Bank’s Policy Due to the general shift in global monetary policy toward rate hikes and plans to normalize balance sheets (i.e., sell stimulus back into the market), capital market risk measures are expected to fall. In an effort to combat rampant inflation, we have heard the unbreakable promise that the system would eliminate accommodation. This has seriously harmed the market and lowered capital markets, which have gained most of their support from investors who rely on the support of the monetary authorities. That fear and market pressure were somewhat alleviated by the BOE’s announced Gilt purchase program, at least temporarily. However, unless this capitulation is universal, I believe it will further exacerbate the instability of competitive policies in the future.
In a broader sense, it’s worth asking if the BOE’s policy announcement can evolve from a stand-alone plea for UK market stability to a broader push for risk appetite across the markets. We still have a lot of doubts about this rise in confidence. We generally believe that two things have the power to systemically change the markets complete deleveraging of risk exposure or a radical shift in the economic context (which takes months to manifest).The VIX’s move toward 35 certainly raises implied risks for the foreseeable future, but it is far from the extremes typically associated with a market that has caved in. We are keeping an eye on the VIX around 50, but what I’m really watching is a sudden rise in implied hedging costs for perceived risks.
What to Keep an Eye On Going Forward: EURUSD and USDCAD have seen a significant increase in the weight of scheduled event risk as we move into the second half of the week. The economic listings may elicit a more decisive response from the indecisive markets, despite the fact that the rhetoric from the central bank is still of great significance. We will be particularly interested in the inflation insights that are available from the economies of the Eurozone and the United States, leaving aside the series of scheduled speaking engagements that Fed, ECB, and BOE officials have scheduled for Thursday. Given the uncertain nature of the background conditions, markets could causally glide past all of these key listings on tap or hang up on any one of the high-level matters.
The event risk surrounding EURUSD over the next 48 hours is unmatched in terms of fundamental weight. Due to the spillover effects of the BOE’s actions – both in terms of European financial stability and a more general curb on safe-haven demands – the pair experienced its biggest single-day rally (+1.4 percent) in nearly seven months this past session. The fundamental influences will become more localized in the future. We will have a series of FOMC officials scheduled to speak throughout Thursday’s session prior to Friday’s US inflation report—the Fed’s preferred measure. Regarding the role of the Euro, the German CPI, sentiment surveys of the Eurozone, and EZ consumer inflation expectations will provide a potent combination from a provocative fundamental interest area.
