Daily Market Outlook, December 1, 2023

Munnelly’s Market Commentary…

Asia - Asian-Pacific stocks had a relatively subdued start to the new month, experiencing limited movement as markets took a pause following the November rally. Economic releases and geopolitical developments, including the resumption of the conflict in Gaza, kept investors engaged.The Nikkei 225 index in Japan traded without a clear direction. Positive data releases, such as a lower unemployment rate, offset the negative impact of a strong currency. The Hang Seng and Shanghai Composite indices faced gradual pressure, attributed in part to the People's Bank of China's large liquidity drain. Despite the unexpected expansion of Chinese Caixin Manufacturing PMI, these indices failed to gain significant traction. Overall, the day's trading reflected a cautious sentiment, with markets taking a breather after the previous month's upward momentum, while economic indicators and geopolitical factors played a role in shaping regional market dynamics.

Europe - The final UK manufacturing PMI report for November, released this morning, is expected to confirm the preliminary flash estimate. It indicates a rise to a 6-month high of 46.7, up from 44.8 in October. However, this level still remains below the 50 threshold that separates positive and negative growth. The flash services PMI for November is more noteworthy, as it climbed to 50.5, marking the first time it has been above 50 since July. The final reading for services PMI will be released next week. In the Eurozone, the final manufacturing PMI for November also showed a flash estimate at a 6-month high. However, it remained well below the key 50 level at 43.8, compared to 43.1 in October. The results for Germany and France were particularly weak at 42.3 and 42.6, respectively. Initial insights for Italy and Spain are expected today, with both anticipated to be just above the 45 mark.

US - Stateside, the primary data focus today is the release of the US ISM manufacturing report. Expectations are for a rise to 48.0 from the October figure of 46.7, which may have been impacted by strikes in the auto sector. Despite being close to the consensus forecast, this still indicates contraction territory. Concerns about softening activity in the broader economy and lower inflation continue to fuel expectations of a Fed rate cut next year, potentially in the spring according to the latest market pricing. Fed Chair Powell is scheduled to speak twice today, including a fireside chat at 16:00 GMT and a roundtable discussion at 19:00 GMT. Additionally, the Fed's Goolsbee, considered a dove, will also speak at 15:00 GMT.

FX Positioning & Sentiment

The options landscape is indicating potential risk associated with the upcoming U.S. Non-Farm Payrolls (NFP) data. The one-week expiry for foreign exchange (FX) options is set for 10 am New York time/15 GMT on Friday, December 8, coinciding with the release of the NFP data. Currently, the implied volatility for one-week expiry in USD-related pairs is at its highest level in a month. Implied volatility measures the expected volatility until the expiry of the options. The demand for implied volatility has already increased, driven by higher FX realised volatility observed earlier in the week. Additionally, a two-week implied volatility boost on Thursday highlighted the risk to FX related to central bank actions in the U.S., UK, and Eurozone. Traders and investors are likely monitoring these indicators closely to assess and manage potential risks associated with the upcoming economic data release and its impact on the FX market.

CFTC Data

The release of CFTC data for the period of November 15-21, though delayed due to the holidays, offers insights into the evolving market sentiment. Despite the potential outdated nature of the data, it sheds light on the short-term trends leading up to the end of 2023. In November, the USD index witnessed a gradual decline, reflecting a more pessimistic Federal Reserve rate outlook. During the specified period, the EUR exhibited a 0.32% increase, suggesting a substantial addition to long positions in the EUR. Conversely, the JPY decreased by 1.32% as the U.S.-Japan spreads narrowed, indicating a likely reduction in significant short positions in the JPY. The GBP saw a 0.32% increase, attributed to less dovish language from the Bank of England and UK inflation staying above the target. Both the AUD and CAD experienced gains of 0.74% and 0.09%, respectively, driven by a positive outlook on China and a reduction in substantial short positions. Bitcoin (BTC) witnessed a 3.54% increase, accompanied by a reduction of 1,344 contracts as of November 14. Sellers were active leading up to a 2023 high, with 38k contracts being sold. While the data may be dated, it provides valuable clues about the short-term market direction during this period.

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0875-80 (748M), 1.0900 (1.8BN), 1.0915-25 (1.2BN), 1.0950 (475M), 1.1000 (2.2BN)
USD/CHF: 0.8740 (424M), 0.8765 (920M), 0.8850 (747M)
EUR/CHF: 0.9570 (456M)
GBP/USD: 1.2500 (316M), 1.2550 (365M) , 1.2680-90 (694M), 1.2700 (525M)
EUR/GBP: 0.8690 (502M)
NZD/USD: 0.6200 (230M)
AUD/USD: 0.6585 (309), 0.6610 (479M), 0.6620-25 (874M), 0.6665-75 (1.1BN)
USD/CAD: 1.3550-60(500M), 1.3600 (1.1BN), 1.3620 (950M) 136.70 (500M)
USD/JPY: 146.50 (1.1BN), 147.00 (1.2BN), 147.50 (569M), 147.70-75 (1BN), 148.00 (802M), 148.50 (1.1BN), 148.75-85 (1BN), 149.00 (849M)