Category: Industry

Traders remain nervous ahead of this week's Federal Open Markets Committee (FOMC) meeting, leading to a decline in US yields, while stocks and oil have also dropped.

The Federal Reserve (Fed) is widely expected to announce plans to quicken the tapering process as inflation continues to soar. Last week's data showed that the US inflation rose +6.8% YoY - right as expected according to the CPI indicator. It was the fastest rate of increase since 1982. In addition, the core CPI jumped 4.9 YoY, meeting expectations, its highest since 1991.

According to The New York Fed's latest survey, the public's short-term expectations for inflation surged to a new record high at 6%. Furthermore, the survey showed that respondents expected prices of everything (from gold to rent and from college to food) to continue accelerating.

It looks like US yields have topped, with the short-term yields coming down from their cycle highs, while the benchmark 10-year US yield topped in March and has failed to post new highs ever since. Furthermore, it declined below the critical 1.5% threshold, suggesting more yield weakness is to come. 

On the other hand, the market has priced an entire rate hike for June 2022, which means the tapering is expected to accelerate from the current pace. Two additional rate hikes are priced in 2022, indicating investors expect the Fed to hike three times next year, with Quantitative Easing (QE) gone as well. 

In that scenario, one would expect yields to move higher. However, short-term yields have surged, but long-term yields declined causing the yield curve to flatten. Investors think that a sharp increases in fed funds will cripple the current economic recovery, leading to rate cuts in 2024 or so. 

Therefore, short-term yields are influenced by the Fed's decision to raise rates, but the market sets long-term yields. And the outlook is not so bright. 

Every trader's goal is to make as much money as possible in the financial markets. When they’re choosing which markets to trade in, traders will naturally ask themselves which markets present them with the best opportunity for profit. 

Two of the most popular markets are stocks and currencies. The main difference between trading Forex and trading stock is obviously, what you’re trading. With Forex, you’re buying and selling currencies, while with stocks, you’re dealing in shares, which are units of ownership in a company.

Here are a few other differences that can help you decide whether Forex or stocks are for you. 

Market size

The forex market is the largest financial and most liquid financial market in the world, even larger than the stock market. It has a daily volume of over 6 trillion USD. 

Volumes that are that big present traders with many advantages. It allows traders to sell and buy currencies quickly and easily. Traders can also get in and out of a position very easily, 24 hours a day, 5 and a half days a week. That means you’ll never be stuck holding a position because you can’t find a buyer. 

A bigger market size also creates tight spreads and more competitive quotes. 

Predictability

In the Forex market, currency prices constantly fluctuate based on supply and demand. When a currency such as the USD is being bought in large volumes, its value increases. When it’s being sold in large volumes, its value decreases. 

These lifts and dips in the currency markets are heavily influenced by financial market news, global economic data, macroeconomic forecasts, short term market volatility and portfolio flows. 

These are all very difficult to predict. 

Stock trading is a lot more straightforward. When you’re trading stocks, the most important thing you need to focus on is the value of your investments. Stock investors use the fundamentals of a company's stock to forecast its future prices, like earning reports that take a lot of the guesswork out of forecasting. 

By contrast, there are more factors that affect the value of a country's currency which makes the movement of currencies more difficult to predict than stock movement. 

Profitability 

When you’re looking at whether Forex or stocks are more profitable you really need to establish the context first. For example how much experience you have, what type of trader you are, what your profitability goals are. Then you’ll be better able to judge which market presents revenue potential for you. 

If you’re new to investing, don’t want to deal with high-risk scenarios, and want to reach your financial goals over the longer term, then stocks would be a more profitable option for you. 

If you’d prefer to be day trading, don’t mind taking some risk for higher rewards, and want to make quick returns over a shorter period of time, then you’d probably be more suited to Forex. That’s because in the Forex market there are lower capital requirements, and you can open and close trades within minutes, while also taking advantage of small price movements with leverage. Keep in mind, even if you are aiming for shorter-term gains, Forex will require an upfront time investment. You still need to have an understanding of the Forex market, know how to read technical analysis and have a fine-tuned, fool-proof trading strategy under your belt before you can see profits roll in. 

The more you know about the financial markets, the more likely you are to make informed choices about where to put your money, and that’s how you’re able to potentially profit when you’re trading and investing. 

A good way to get started is by practising with a virtual trading account. The hands-on experience will help you build the trading acumen you need, while you gain first-hand insight into the market you have more affinity with before you put your real money on the line. 

US equity indices advanced every day last week, rising for a fifth week for their longest rally in 14 months.

Sentiment remained bullish on Monday, boosted by the latest news that Regeneron Pharmaceuticals announced a Phase 3 trial of its injectable monoclonal antibody cocktail, REGEN-COV, which effectively prevented people from becoming sick from COVID-19.

The company said REGEN-COV reduced the risk of illness by 81.6% over a two to eight month period for those who received the four subcutaneous injections. In addition, it reported zero hospitalizations in that period. 

Additionally, Pfizer reported similar results with its anti-COVID pill, sending the company’s shares sharply higher. 

On Friday, traders paid attention to the US labor market update. October nonfarm payrolls increased by 531,000 jobs, and data for September was revised higher to show 312,000 jobs created instead of the previously reported 194,000. Nevertheless, both the US dollar and US yields fell after the release of the report. Traders bought stocks after the data, sending the major bourses to new record highs.

More Room To Go?

Moreover, the Goldman Sachs flow trader Scott Rubner, who said in mid-October that the meltup is just starting, has a stunning update for what could happen next. And it appears that at this point, going simply on technicals and flows, a 5,000 target on the SP500 is not unreasonable.

In the last two weeks, options trading in the USA has never been greater. 

“After following the retail trading community for 18 years, I could never imagine typing these large numbers” Rubner said.

However, indices now look overbought on many time frames, implying a correction is due soon. 

Nevertheless, the seasonal Christmas period is nearing, usually leading to solid gains in the stock market. Therefore, the SP500 index could still achieve the 5,000 USD psychological level by the end of the year. 

Technically speaking, it is now challenging to find any resistance since stock indices have never been here. Therefore, traders might watch for any unusual price formations indicating a possible price reversal.

On the downside, the key medium-term support is at September highs; for the SP500 index, it is at around 4,550 USD. As long as the index trades above it, the outlook still appears bullish.

All eyes are still set on oil as the commodity continues to perform well, climbing above the 85 USD level on Monday, confirming the long-term bullish trend. 

It is hard to believe that in April 2020, oil dropped below 0 USD as nobody wanted the commodity. Fast forward to today, the WTI benchmark is trading at levels last seen in 2014.  And it looks like the bull market can go on further. The 100 USD psychological level could be reached this year.

Oil was also supported by the recent Goldman Sachs analysis by Callum Bruce. The bank estimated that global oil demand has surpassed 99 mb/d and will shortly hit its pre-COVID level of 100 mb/d as Asia rebounds post the Delta wave.

Furthermore, OPEC+ is adding output back on the market gradually while stockpiles are steadily declining and JPMorgan warned on Friday, that Cushing could be effectively empty in just a few weeks.

It looks like the energy crisis is far from over, pushing higher energy prices everywhere. Natural gas is above 6 USD, the highest since 2014. Moreover, if there is a harsh winter in Europe, which analysts expect, energy prices will likely soar further.

Lastly, everybody but the central banks know that inflation would not be temporary, benefiting commodities. Oil tends to be one of the best inflation hedges, and it has confirmed this role pretty well recently. Because it has jumped from below 0 USD to the current 85 USD, it has outperformed both gold and silver. 

Gold is up nearly 10% since April 2020, and it has not moved anywhere over the last year. It remains stuck near 1,800 USD. If we take 15 USD as the reference bottom in April 2020 for oil (although it was even below 0 USD), then oil is up nearly 500% in 18 months. 

Technically speaking, as long as oil remains above 80 USD, the medium and long-term outlooks appear bullish. Dips are expected to be bought. Traders seem to be ignoring the overbought conditions in the market for now.

The US dollar seems to be struggling recently, and the dollar index is down for four consecutive days on Monday. It looks like the recent bullish trend might be running out of steam. We can say the same thing about long US yields, as the 10-year Benchmark yield posted a bearish reversal candle on Monday. At the time of writing, the 10-year yield stood at 1.58%, down from the daily highs at 1.62%.

The Curve Flattening is Usual a Negative Sign

The yield curve continues to flatten dramatically as short-term yields go vertically higher and market participants expect rate hikes to begin by September 2022. However, the 10-year or the 30-year yields are consolidating and not rising to new highs. 

That could be interpreted as a policy error by the Federal Reserve (Fed) as the central bank will have to raise rates, possibly crippling the current weakening economy. Therefore, short-term yields are spiking higher, and at the same time, investors are buying longer-dated bonds, which are usually taken as a safe haven instrument.

Since short-term yields are usually a better driver for the US dollar, it is somewhat surprising that the greenback has declined recently, despite a sharp increase in short-term yields. 

Nevertheless, the US dollar should remain supported as the Fed is expected to tighten its monetary policy and reduce the monthly amount of bonds it buys, also known as the tapering process. The tapering process is likely to end in July 2022, and it will likely begin in November or December this year.

The View Remains Bullish

In the view of economists at HSBC, the USD will likely remain resilient amid slowing global growth and the Fed’s forward guidance on rate hikes. 

“In our view, ‘stagflation lite’ – a lighter version of the 1970s stagflation – is occurring. We believe that this still plays to the advantage of the USD – one of the ‘hardest’ currencies.” they concluded.

The daily chart of the Dollar Index is still looking bullish. But a short-term correction toward previous highs near 93.50 cannot be ruled out. Bulls are expected to step in and buy the dip in that scenario, especially if yields continue rising. However, if that support is not held and defended, we could see a larger and more significant correction toward the 50-day moving average, currently near 93.20.

Alternatively, if the bulls regain control of the market, the first target lies at the current cycle highs near 94.50. Should the index rise above and close beyond it on a daily chart, the long-term uptrend would be confirmed, most likely sending the USD toward 95, or possibly to 96 levels. 

For the first time since November, 2014 oil continued to move higher this week managing to get above the level of 80 USD. The energy crisis that’s getting worse in the EU has now spread to the US and China. While the whole energy sector has been rising, investors seem to ignore the strengthening US dollar or soaring US yields. 

The soaring US yields prices might only worsen the inflation that is already at its highest and it really seems this inflation is going to stay here for long. 

According to Reuters, The White House is once again reiterating – most likely in a strongly worded email – and urging OPEC+ to increase crude production. In addition, White House officials say they

"…are using every tool to address anti-competitive practices in US and global energy markets."

However, all these actions have not helped so far. As a respected energy market and geopolitical observer Daniel Yergin told Bloomberg,

"… the Biden admin doesn't have many tools on energy prices."

Recently, Moody's Investors Service has returned to the pre-pandemic oil prices of 50 - 70 USD a barrel range, on the back of expected restraint in production growth and a rise in costs. However, that is still way below the actual price and much more pessimistic than major banks on Wall Street, where the consensus is between 80 and 100 USD.

The next target for oil is likely in the 90 USD region, and considering the current bullish momentum, it could be reached pretty quickly. However, oil needs to stay above previous highs of 77 USD for the medium-term outlook to remain bullish. As long as that is the case, dips are expected to be bought, and the market should continue making new highs.

First, what are stocks? 

Stocks are instruments that generate interest-bearing payments (dividends) to investors. So basically, when you buy a stock, you buy a percentage of ownership in a business. Let’s say if you own a property for years you can be sure that you will be able to sell it for more money than you bought it for. It works the same with stocks. They are appreciated for a long run. 

When buying stocks, you buy ownership in a business, and you are aware that you are not the only owner and there are other shareholders. These people believe that the company will be successful and will be rewarded for their investment with dividends and capital gains.

The value of a stock can go up and down. Stock’s value basically represents company’s value. There are many different factors that affect company’s stock price and the most important one is the company’s earnings. 

How to invest in stocks

There is actually nothing difficult in buying a stock. First, you'll need some capital, a payment account, and a payment method you can use. Second, you'll need a broker. Brokers are the middlemen between you and the big companies that create and sell stocks.  

Many online brokers allow you to buy stock without paying a penny upfront. All you need is a form of payment and a few minutes to sign up and open an account. All you really have to do is choose a broker that offers you the most competitive commissions, and helpful customer support.

What stocks to invest in 

The buying part is pretty simple to understand, but then the question is what stocks to invest in.  And there might be a difficulty in picking the right one. The stock market consists of a large number of different types of companies with varying share prices, but as a general rule, all stocks are considered "equities." All of them are considered public companies and their financials are open for everyone to see. The stocks on the NYSE are usually followed by a ticker symbol, while smaller companies' stocks are often abbreviated as CCC, LP, and OTC. 

There are over 40 different asset classes that stocks can be classified under, so we'll just stick to the most common classes: common stocks, and exchange-traded funds (ETFs). 

There is such thing as value investing, when you want to buy companies that are valued lower than what the company is worth. But there's more to it than that. What does it mean to be undervalued? In a word, that means there is a massive margin of safety, that the company could (and most likely will) rise in value. 

So the advice is to only buy stock in companies that you understand – not just on the basis of a valuation check, but on a more fundamental level.

Investing in stocks doesn't require special expertise or follow any rules. But if you're a total newbie to the stock market, you might be nervous about buying individual stocks. Since you don't know what to expect, it's best to stick with a low-cost index fund.

Conclusion

Stock investing is not a rocket science and pretty much anyone can start investing in stocks. But before you get started, it doesn't hurt to do some research, find the right broker and the right stocks to invest in. 

This Monday the US stock indices were down 2-3%. In addition, during the three last weeks the medium-term top has been formed. It was caused by the recent situation with a real estate collapse in China that forced investors to sell risky assets in a fear of contagion. 

So what actually happened? The Chinese real estate giant Evergrande will likely default this week, possibly causing some tremors in the financial markets as several US banks have notable holdings of Ever bonds. The company is scheduled to pay its interest on 23^rd and 29^th of September. However, Evergrande is scheduled to pay interest on bank loans Monday, with a one-day grace period and if it fails to arrange an extension of Monday's payments, it could be in technical default as soon as Tuesday.

When the most extensive sell program happened in May, it took the markets several days to shake it off before running higher again. Should the exact scenario repeat, we might see further selling before going higher again. 

The banks should be prepared for this massive sell-off to escalate and Morgan Stanley seems to have had it right from the start when set the lowest target on Wall Street which is currently at 4,000 USD for the SP500 index. 

"With our year-end target 10% below current levels, our view is clear: the mid-cycle transition will end with the rolling correction finally hitting the S&P 500." The bank reiterated its target this week. They expect the correction to continue amid many factors - rising inflation, tapering expectations, extremely overbought market, and more. 

Later this week, the Federal Open Market Committee (FOMC) meeting takes place, and the Federal Reserve (Fed) would need to sound really dovish to calm the markets otherwise it could risk a much steeper sell-off.

On Monday, West Texas Intermediate (WTI) oil climbed above the critical 70 USD, while the European Brent benchmark advanced toward 74 USD. Oil continued to rise amid Hurricane Ida’s impact on US output. About three-quarters - or about 1.4 million barrels per day - of the offshore oil production in the Gulf of Mexico has remained halted since late August.

“Hurricane Ida was unique in having a net bullish impact on US and global oil balances - with the impact on demand smaller than on production,” Goldman Sachs analysts said in a note from last Friday.

We could say that USD had affected this changes in oil price, but that is not quite correct. However, the EURUSD pair managed to get back above its 50-day average at 1.18, and if it produces a rally, oil might be further supported. 

The WTI is now near 69.60 USD and it managed to push above the 50-day moving average, confirming the bullish bias and setting the short-term outlook to bullish. Additionally, staying above the psychological level of 70 USD is also supporting the bullish case. Lastly, the price managed to rise strongly above the bearish trend line, which had been limiting oil since July, ending the medium-term downtrend. 

Oil is now trying to close above the resistance of 70.55 USD, possibly leading to another leg higher, targeting the 74 USD zone.  Alternatively, there are several strong support zones - the psychological barrier at 70 USD, the 50-day average at 69.60 USD, and the broken trend line at 69 USD.