What’s driving markets higher?

Buoyed by hopes that softening US economic data is going to lead to a change in central bank policy, stocks have risen along with metals and bonds, with the dollar going in the opposite direction. The key question for investors in any of these markets is whether the moves will last. After all, it is not the first time we have seen such a squeeze this year, only for the selling pressure to then resume and more profoundly than the rally. Fundamentally, not a lot has changed but there’s quite a bit of ‘hopium’ in these markets.

Why the sudden rally?

There’s hope that central banks will soon start to pivot towards a more dovish stance, which investors presumably expect will alleviate some of the pressure on risk assets. Paradoxically, bad news is good news for stocks. Or so it seems, after the markets rallied on the back of a poor PMI data on Monday, which revealed US manufacturing activity barely grew in September, with the purchasing managers also reporting a sizeable fall in the sector’s employment.

Hopes over a dovish pivot were boosted further by the Reserve Bank of Australia, which raised interest rates by only 0.25 percentage points instead of 0.5% expected.

On top of this, the Bank of England has temporarily restarted QE to help depress long-term bond yields to lower the borrowing costs in the UK, where inflation has soared to double digits. So far, the magic has worked.

With the markets having been nearly one-sided – namely long dollar, short everything else – the liquidation of those positions is undoubtedly a big reason why the markets have squeezed in the other direction so viciously.

Will the positivity last?

While the start of Q4 has been a positive one so far, I fear much of the factors that had weighed on risk appetite are still there.

The gains come on the back of a poor third quarter for risk assets, when concerns over persistently high inflation data sparked big interest rate rises from the Fed and the world’s other big central banks. The aggressive tightening came at the time when growth was also very weak or non-existent amid an energy crunch in large parts of the world. As a result, investors were not looking to take on much, if any, risk at all. This weighed heavily on stocks, cryptos, metals and bonds.

Consequently, I am expecting the stock market recovery to fade and the dollar to resume higher in the not-too-distant future. The greenback could find its feet again if Friday’s US jobs report once again beats expectations, as it has done so for the last 5 months or 7 out of the past 8 months.

All about NFP this week

The disappointing ISM PMI report on Monday also revealed a sizeable drop in its employment sub-component, which plunged by 5.5 points to below the boom-and-bust level of 50, at 48.7 from 54.2 the previous month. If this week’s other NFP leading indicators also reveal weakness in employment then we could very well see the first disappointing non-farm payrolls report in six months. This is what investors are presumably expecting to see. Thus, in the event the jobs report is stronger, then worries about rate hikes may come back to haunt investors.

Don’t forget the lower lows, lower highs

While it ‘feels’ like the markets may have bottomed out – which is certainly a possibility, a small possibility but a possibility nonetheless – it is important to not get caught in another bull trap. The lower lows and lower highs are still there for many global indices, including the German DAX index, below. Until we have a change in that trend, so that the markets start making higher highs and higher lows, treat this phase of recovery with extra care. We are still in a bear market and this could just turn out to be another relief rally.

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.