Despite the S&P index down just 30 points on the week, the average member faced a stark contrast. The index fell 1.2% on Thursday, as more than 300 of its constituents advanced, the second-widest divergence since 1990.
The macro backdrop pulled in two directions, with Brent crude climbing to a five-month high above $113 after attacks on Saudi energy sites, yet USTs had their biggest one-day rally in more than a year as the AI scare took priority over the inflation impulse from oil. In our view, the tech selloff was pinned on an AI scare, but the real catalyst is elevated oil and geopolitical tensions. Risk-off across the board.
There was little on the rates front last week as Fed speakers were in a blackout, so the rates story remains a hold this week and a hike in December.
The dollar fell against every major currency as tech weakened, an unusual outcome for a week characterised by deteriorating risk sentiment. A haven bid in bonds reduced the rate differential supporting the greenback. The yen was up 1% against the dollar as renewed foreign demand for JGBs and speculation on domestic allocations from Japan’s Government Pension Investment Fund all point to a potentially more durable source of yen support. Even amid mounting French fiscal stress, the euro strengthened against the dollar.
Gold failed to serve as a haven bid. Our thoughts from the week’s end are that traditional risk-off correlations are becoming unreliable. It is becoming harder to identify a single defensive asset, particularly when the source of market stress ranges from geopolitical supply shocks to financing and the equity narrative.
Five central banks meet in the week ahead, including the Fed, which we discussed in our memo toward the end of last week (here). Whether we see any consistency return in fickle markets remains to be seen. For the next few days, however, oil/ME directs markets.
Let’s get into the guide to trades moving markets, where things stand, and where they may be heading.
“Self-Fulfilling Scare”
“Watching From the Sidelines”
“Everything Else Is Noise”