The October U.S. consumer price index (CPI) printed at 0.9% MoM and 6.2% YoY, which is the highest in 31 years. The data is putting further pressure on the US Federal Reserve’s belief that the current surge in inflation is "transitory". If the US Federal Reserve cannot hold the “transitory” guidance anymore, the tapering plan will become more aggressive next year, and a rate hike will be sooner than what was indicated at its November meeting. So what does it mean for the broader markets?
The U.S. major averages closed lower for the week
On Wednesday, the Dow Jones Industrial Average slipped 0.66%, to 36,079.94. The S&P 500 fell 0.82%, to 4,646.71, and the Tech heavy Nasdaq, slid 1.66%, to 15,622.71. The stock markets extended losses for the second trading day amid concerns of ongoing burning inflation. The data is only pulling off an alert for the bull frenzy to pause a 5-week winning streak in U.S. stocks. The three major indices are still hovering around all-time highs.
However, bond traders’ movements are more reflective of sentiment. On the same day when the data was released, the key measurement for the long-term prediction of inflation, the 10-year U.S. treasury yield surged 13 basis points from the previous day to 1.57%. The spike in the bond yields induced a more aggressive sell-off in tech stocks, which benefit more from low interest and low bond yields, as higher interest and yields will press on the valuation for these growth stocks with more long-term debts than others. The technology sector and communication services lost ground, falling 1.68% and 1.25% respectively. The tech giants (MAANG) all fell between 1% and 3%. The chipmaker Nvidia slid 3.6%, and AMD fell 6.15%. Energy also tumbled due to a slump in the crude oil price.
Bank stocks, however, are finding strength due to surging bond yields. JPMorgan Chase was up 0.15%, Wells Fargo was up 1.39%, and Citigroup climbed 0.4%. Also, in the defensive sector, utilities lifted 0.7%.
Risk-off sentiment starts prevailing, USD strengthened, gold and crude oil are moving in divergence
The falls in the stock markets also sparked the risk-off sentiment in the FX and commodity markets. USD became a safe-haven currency again. The dollar index surged 1.2%, to 95.11 on Friday from Wednesday’s low, the highest since July 2020. Gold futures finally broke through the pivotal 5-month resistance at $1,830 with a $47 surge and finished at $1,867.70 per ounce for the week. Inversely, the crude oil futures price plunged near 5% in the weekly performance. The WTI futures slumped 4.7% from the open on Wednesday and finished at $80. 69 on Friday.
Investors tend to buy gold as a safe haven to cover oil price risks sparked by increased demand following the pandemic.
The dilemma is showing in cryptocurrencies movements
There have been some interesting moves among cryptocurrencies last week. Both Bitcoin and Ethereum surged to all-time highs before falling to session lows on Wednesday. Cryptocurrencies are being seen as an alternative asset class to offset inflation risks, but at the same time are being considered as a risky asset as it is technology related. The supporters are seeing the DeFi technologies are the future of the utilization in businesses. But some analysts continue to see no fundamental support for these digital coins. However, the crypto sector has been in a very strong bullish momentum since July when several influential entrepreneurs including Elon Musk, Catherine Wood, and Jack Dorsey, gave positive comments at the Bitcoin Conference.
Signs of an ongoing burning inflation run
The following economic data underscored a worker’s rising compensation induced consumer price spike on Friday. The U.S. October consumer sentiment fell to 66.8, the lowest since Nov 2011. The data gives another insight that high inflation is pressuring spending. Meanwhile, the number of workers who quit their jobs rose to a record high as employees are seeking higher-paid jobs due to the rising consumer prices in the backdrop of tightened labour markets while Delta Variant is spreading.
Technical Analysis
Nasdaq – daily (a continuous upward trend is intact with a potential further pull-back on the resistance of the upper band of the ascending channel)
Oscillator signals:
a death cross in the overbought territory in stochastic
A forming death cross in MACE and the buying momentum fading off
Pivotal supports:
The imminent level is at the 20-day MA at 15, 767
The next level is at the 100-day MA around 15, 000
Gold – daily (A strong break-out of the triangle pattern at the pivotal resistance at 1,830 with a potential pullback to confirm at the same level)
Oscillator signals:
A crossover of the midline of MACD to be building up a bullish momentum
Overbought in Stochastic and a near-term potential pull-back
The pivotal support; 1,830
The key resistances:
The imminent level is at the previous day high at 1,868.79, which is also the Fibonacci retracement at 50.00%.
The next level is at 1919.21 at Fibonacci retracement at 61.80%.
