The Best Run Of The Year (So Far!)

WHERE WE STAND – A quiet-ish end to the week on Friday, as expected with the day having lacked major data or news-related catalysts.

The absence of any significant pre-weekend de-risking or hedging activity was notable, though, and implies that participants’ heightened degree of sensitivity to geopolitical developments may well be beginning to fade. Of course, Israeli retaliation to the Iranian missile barrage launched earlier this month has yet to come to fruition.

In any case, the S&P wrapped things up with a 6th straight week of gains, the index’s best run of the year so far. My long-running bull case remains intact, with Q3 earnings season so far meeting expectations for a fifth straight quarter of YoY earnings growth, the economic outlook remaining solid, and the forceful ‘Fed put’ continuing to underpin sentiment.

That said, it wouldn’t be too surprising to see some risk begin to be taken off the table in relatively short order, with just 2 weeks to go until the presidential election. In many ways, with the S&P up well over 20% YTD, it would be folly for the bulls not to trim equity exposures a little, in the short-term at least.

Elsewhere, the FX space continues its renewed focus on relative growth differentials, with the pace of policy easing again having become relatively synchronised across G10. While the FOMC had appeared in more of a rush than others to return rates to a neutral level, peers are now catching up - the ECB delivered back-to-back cuts last week for the first time in a decade, while the BoE will probably do the same in Nov and Dec after last week’s much cooler than expected inflation figures.

Such an environment should continue to benefit the greenback, which lingered close to 2-month highs at the end of last week, as the market once again remains happy to reside in the left-hand side of the dollar smile.

This renewed attention on the ‘US exceptionalism’ theme has seen the Treasury curve continue to steepen as well, with such a trend likely to continue, especially with the 40bp of Fed cuts that the USD OIS curve currently discounts by year-end looking far too hawkish, leaving room for the front end to rally further.

All that - solid sentiment, a stronger USD, and a steeper curve - per the textbooks at least, suggests that gold should be trading a lot lower than it currently is. Nevertheless, the yellow metal has been a head-scratcher all year, and continues to be so, having rallied to fresh record highs north of $2.7k/oz on Friday.

Long gold, again, seems to have become a momentum play, and even though the fundamentals look rather shaky, it’s not a move that I’d be keen to stand in the way of just yet.

LOOK AHEAD – A quiet day ahead with no top-tier economic releases due; something that is very much a theme of the coming week.

Three Fed speakers are on deck, however, kicking-off a busy week of central bank speakers, as the annual round of IMF-World Bank meetings take place in Washington DC. As is usually the case, these meetings, and the associated remarks, are likely to produce much more by way of ‘noise’ than ‘signal’.

Earnings season also steps up another gear this week, in what will be the second busiest of reporting season. Today, though, only SAP are of note.