Weekly Summary: U.K. Debt Market Is In a Mess Again

Volatility in the U.S. stock market is overwhelming. The S&P 500 broad market index touched November 2020 lows at 3490 points, diving by 2.5% on Thursday. But suddenly the index recovered and gained 2.5% by the end of the day, finishing at 3685 points. This acrobatic flip-flop came after the release of September inflation data in the U.S.

The release came as an unpleasant surprise as the data indicated that the economy had no reaction to the Federal Reserve’s (Fed) striving efforts to tame inflation. Lower crude prices also did not have a significant impact on inflation as Core Consumer Price Index (CPI) – that is calculated excluding volatile food and energy prices - recorded another hike to 6.6% year-on-year in September from 6.3% in the previous month.

Considering strong the labour market in the United States that was confirmed by the recent Non-Farm Payrolls data and unemployment level that contracted to 3.5% from the previous 3.7%, the steep trajectory of the Fed interest rates hikes looks like a foregone conclusion.

However, this does not explain the swift rebound of the S&P 500 index. Investors suggested such an upswing could be a result of too many short positions. The other theory suggests that investors do not believe the Fed would continue its hawkish march with the same tempo. The second theory could be confirmed by the global debt market dynamics as yields on U.S. Treasuries, the U.K. and European debt went down. That could mean that investors may expect the Fed to tame its hawkish appetite at the beginning of November.

Meanwhile, British finance minister Kwasi Kwarteng failed to avoid the responsibility of tax cuts proposed by the new government. He tried to postpone delivering a new altered budget in an effort to shift responsibility to the Bank of England (BoE) governor Andrew Bailey by saying that dumping a Pound and rising U.K. debt yields would be “a matter (BoE) for the governor” if the rout extended into next week. But Bailey cut Kwarteng off by saying that the BoE has no plans to extend temporary QE and it should be terminated this Friday.

So, a new sell-off wave could be expected starting next Monday or the new U.K. finance minister must release the new altered budget as soon as possible. In this case, markets are likely to continue at  current levels. Retail sales in the United States and the start of the corporate reporting season would hardly decisively affect them.

Another major issue that will be monitored is the opening of China’s ruling Communist Party Congress on October 16.

Meanwhile, the S&P 500 index has jumped to an upside formation with a primary target at 3850-3950 points. Although it is too early to close short positions on the index, it may become reasonable if it continues sharply up on Friday and Monday. Long-term targets are seen to be intact at 2000-2200 points.

Brent crude prices are balancing above $90 per barrel after the decision by the Organisation of the Petroleum Exporting Countries and its allies (OPEC+) to cut production by 2 million barrels per day. The pressure on prices is huge as crude inventories in the United States jumped by 9.8 million barrels this week amid rising recession risks. Prices even dived to $91.5 per barrel but later recovered to a safer level of $94 per barrel, the level at which prices are likely to finish the week. An aggressive downside scenario with targets at $50-65 per barrel by November is intact.

Gold prices are crawling down below the $1660 per troy ounce. The dive may accelerate at any moment amid a downside scenario with the targets at $1350-1450 by the end of October. Nevertheless, it is very risky right now to add new short positions amid strong geopolitical uncertainties that may push gold prices up.

EURUSD is aggressively sliding down towards 0.95000-0.96000. Any upticks to 0.97900-0.98200 are interesting to open short positions.

It is much more complicated to trade GBPUSD amid elevated volatility. The pair changed its formation to the upside hitting the targets at 1.13500-1.14500. Further movements would depend on the statement of the British finance minister over the weekend. So, no new positions should be seen here.

Long-term indicators signal that the Pound may recover to 1.17000 and go further up by the end of October. But EURUSD is still under strong pressure. So aggressive long positions on GBPUSD within the 1.11500-1.12000 area with targets above 1.17000 are seen to be justified. However, traders must remember that these trades are valid until the end of October and should be executed at low volumes.