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Summary:

  • Stocks are rallying with aggression to continue the turn-around started on Friday; leading many to believe that ‘bad news is good,’ again as rate hikes are appearing increasingly unlikely given the weakness seen in the United States; and many are expecting the Fed to ‘kick the can down the road,’ yet again.
  • Oil prices have remained relatively stable throughout the month of September, building in a fairly-consistent symmetrical wedge; but this remains one of the primary drivers across markets.
  • Thursday is lining up to be a ‘big day,’ as China re-opens while reporting Foreign Direct Investment, Alcoa kicks off earnings season in the United States, and the Bank of England holds their press conference around their rate decision.

1. Is bad the new good, again? Stocks are throttling higher as a 2015 rate hike out of the United States looks less and less apparent: After Friday’s abysmal NFP report drove risk-aversion across markets, investors staged a quick change-of-tune as data points out of the US have become increasingly weak, leading many to believe that the Fed will not tighten policy anytime soon. Surely, this goes against everything that we’ve heard from the Fed: But the multitude of forces swirling in the global economy make a rate-hike from the world’s largest Central Bank seem extremely unlikely.

With multiple Fed members set to speak this week, we’ll likely hear more on this topic as the week progresses; but for now, risk is on in a big way as stock markets around-the-world are trading higher under this apparent pricing in-of ‘kicking the can down the road.’ It appears as if we’re trading with the logic of ‘bad data is good for risk,’ again, as the more negativity that data prints show, the higher the probability of additional-expected stimulus.

S&P Futures are up over 75 handles from the low on Friday after the shock of NFP was absorbed; Stocks in Asia and Europe opened up with the week reflecting this strength carrying over from Friday’s US-session, and that price action has continued into early-US trade. Chinese markets remain closed until Thursday in observance of Golden Week; and later on Thursday, Alcoa reports earnings to kick-off earnings season in the United States.

Earnings season should be interesting, as earnings are generally considered to be the primary driver of stock prices; and up until now, earnings in the United States have held up remarkably well with this flurry of geo-political and economic factors becoming more worrisome. With the slump in commodity prices now beginning to show up in corporate earnings, investors are now starting to get an idea of how much companies might be impacted by falling prices. As the example of Glencore showed us, the slump in commodity prices can have far-ranging impact on companies with heavy exposure to commodity mining and distribution; and as these companies contract to reflect the squeeze that inevitably hits their margins, this weakness in commodity prices can bring weakness into other areas of an economy. This is starting to show in High-Yield Debt in the United States, along with small cap companies in the Russell 2,000 Index.

In the chart below, we can see this enormous reversal in the S&P 500 as traders have begun pricing-out that 2015 rate hike. This could turn on a dime if Fed members talk up a rate hike throughout the week, extinguishing investors’ hopes that this spate of weakness in US data not spell even more ‘extraordinary accommodation’ as markets have become accustomed to.

Stocks Rally on Hopes of the Can Being Kicked Further Down the Road

Created with Marketscope/Trading Station II; prepared by James Stanley

2. The big X-Factor is Commodity Prices, which have been stable of late: As ‘Black Monday’ out of China began to filter into the rest of the world on August 24th, the big reason that this impact was felt so aggressively outside of China was the huge implication on commodity prices. As the slowdown out of China becomes more-and-more aggressive, the expected toll on commodity prices continues to increase as the 7% target growth numbers look increasingly less-likely to be met. As this demand from China dampens given the enhanced supply that’s resultant of six years of ZIRP, prices on commodities take a hit. This has led Goldman Sachs to make a call for $20 oil; which would be a dramatic drop from the current price of $46.00.

Since September, price on US Oil has stayed confined to a declining range from $43 to $48.80; building in a fairly consistent symmetrical-wedge. If prices break below $40, look out – as the implications for future corporate earnings and could be extremely negative.

For now – trade the range until the range breaks:

Stocks Rally on Hopes of the Can Being Kicked Further Down the Road

Created with Marketscope/Trading Station II; prepared by James Stanley

3. Economic calendar is loaded again: The first week of the month will generally be fairly active in the FX market, as we’re usually hearing from at least one Central Bank along with the release of Non-Farm Payrolls, and last week certainly did not disappoint; but the second week can be just as active, as we get more Central Bank announcements combined with some other important reports. This week is no different, but the biggest headline risk may be what’s not currently found on the economic announcement calendar.

Russia’s role in Syria could potentially be a game-changer depending on how the situation develops; and the impact of China will likely be allayed to later in the week as Chinese markets remain closed until Thursday. But Thursday presents a couple of areas of potential-risk, as China reports Foreign Direct Investment on Thursday as they re-open for business (which likely took an outsized hit after a brutal September), and then Alcoa kicks off earnings for the US later in the day.

On the Central Bank front, we hear from the RBA out of Australia later tonight; and this could be telling as to how the bank is considering the slowdown in Commodities and China. This could be seen as a proxy for how westernized Central Banks may consider these two forces. On Thursday morning, we hear from the Bank of England and this could be telling, as this is the other economy seeing signs of inflation and discussing the possibility of a rate hike: If Mark Carney and the Bank of England allude to the slowdown in China and commodity prices as reasons to hold off of higher rates, expect risk to throttle higher to reflect this ‘bad is good’ type-of-environment again.

And also on Thursday, we get the release of FOMC minutes from the September meeting when the bank gave the world the ‘hawkish-hold’ that threw global markets in a tizzy. This minutes release could be especially market-moving, considering we had one vote for negative rates at the last meeting, and we could get clarity on the banks reasoning behind keeping rates flat after promising a rate hike for over three years.

High Impact Data on the Calendar for this week:

Stocks Rally on Hopes of the Can Being Kicked Further Down the Road

Taken from DailyFX Economic Calendar, high-importance announcements only for week of October 5th.

Disclosures

Written by James Stanley of DailyFX; you can join his distribution list with this link, and you can converse with him over Twitter @JStanleyFX.