It is a very jittery market, and inflation fears combined with more COVID-19 will not bode well for markets that are overstretched and running on vapors. The sentiment is bearish and the fundamentals are doing nothing to prevent sentiment from deteriorating. The technicals are also showing that the path of least resistance is to the downside, so in order to prevent a repeat of 2020, either the US government or the central banks must act as a catalyst.
Red-letter days are everyone's dream. Federal Reserve Chairman Powell gave the markets a red-market day today. Not sure everyone wanted that! The Volatility Index (VIX) shows the market ranges have expanded at the same rate on Powell’s remarks as they did when the ‘Variant of Concern’ came to light at the end of last week. As investors digested remarks made by Federal Reserve Chair Jerome Powell, shares on all major U.S. stock exchanges fell deeper into negative territory, with the Dow Jones Industrial Average plunging over 550 points. As the head of the central bank noted, the word "transitory" no longer refers to inflation, and the most recent figures suggest that inflation pressures have been elevated.
Without a massive response from the Fed or the US Treasury in the coming days, I fear we have broken the bullish structure in the S&P500 and that we will see a bigger correction over the coming days. It could be a short sharp correction but I would imagine at least 10% lower and a sweep of the October lows would be the most obvious trade at the moment.
In good news, Ugur Sahin, co-founder of BioNTech SE, claimed today that the Omicron coronavirus variant has a low likelihood of causing severe COVID-19 in vaccinated people. He noted that the new mutation might result in more infections among the inoculated. However, Dr. Sahin insisted that "the plan remains the same: Give a third booster shot as soon as possible."
In terms of scheduled news, the US Chicago PMI for November came in worse than expected at 61.8 and the 20-city S&P CoreLogic Case-Shiller home price index in the US rose 19.1% year-on-year in September. That was down from 19.6% in August, missing market expectations of 19.3%, but remaining near records. Canadian GDP Q-o-Q came in better than expected with the October GDP figure expected to come in at 0.8%.
There is a worry still that the US government could default on the 3rd of December, as that was the date set by US Treasury Secretary Yellen when the first temporary fix was agreed. US Senate Majority Leader Schumer said the government may pass another stopgap funding bill tomorrow.
There will be a rush for safe-haven currencies like the yen and with everything that is going on in the world and I assume no default from the US government on its current liabilities, the treasuries are going to be in high demand. The TLT just broke out of the corrective pattern, and we could see a very big rise from here on in.
The USDJPY has unwound the initial sell-off from this morning when the Moderna news came out, but as it has not been able to take out the previous swing high and channel top, there is a strong possibility the bears step in again. Should there be a move to the US dollar as we saw before when COVID ripped through the world, the USDJPY would need to get above resistance and prove that it had become support before I could get bullish.
The daily US dollar index shows the predicament of the greenback best. Today is looking like it will end where it opened as traders try and work out how bad things are going to get for the rest of the world while the US government sorts out the US government funding etc.