Thin liquidity might threaten the current risk-on sentiment

US market shut, low liquidity session ahead

The trading week has probably come to an early end this week as the US observes its Thanksgiving holiday today, while tomorrow is the iconic Black Friday. Following the weak Conference Board consumer confidence index for November, the traditional start of Christmas shopping will offer the most up-to-date signal of both consumer appetite and health, following a difficult shutdown period.

Meanwhile, risk markets remain in a buoyant mode, mostly on the back of the ballooning Fed expectations for a December rate cut. The probability assigned to such a move stands at 76%, with the usual Fed blackout period commencing this weekend.

Hence, US indices are recording solid price gains this week, almost fully recovering from last week’s abysmal performance. The Nasdaq 100 index is leading the rally and has quickly returned inside the key upward trend channel that has been in place since mid-May. This move comes amidst a looming battle between Nvidia and Google, as the latter’s TPUs are gaining ground in the hardware world. While the AI market is probably large enough to accommodate both, Nvidia’s dominance might be tested going forward.

Similarly to stocks, the crypto market is showing some bullish momentum. Bitcoin has climbed above the $90k level, while ether is trying to remain above the $3,000 threshold, 15% higher than its recent trough. While the improved risk appetite and the rising stock indices could continue to pull major cryptocurrencies higher, the outlook remains challenging for cryptos.

Post-Thanksgiving rally in focus

For some investors the famous Santa Rally commences after Thanksgiving. And there is remit to this claim. Since 1991, US stocks, using the S&P 500 and the Russell 2000 indices, have posted positive returns in the period between Thanksgiving and year-end in 26 out of the 34 instances examined. This high percentage is also met when examining the four years – 1997, 2003, 2008 and 2014 – when Thanksgiving was on November 27, the same date as this year.

This trend is further supported by examining the first year of each US presidency since 1991. In eight instances, stocks send the most bullish message, with dollar/yen also showing a strong tendency to rise. Finally, during US President Trump’s first term, both gold and euro/dollar managed to rally in every one of the four years he was in office.

Dollar/yen remains in the vicinity of 156.74

Seasonal trends might not offer much help to the yen, as markets remain uneasy with the Japanese PM’s spending appetite and the BoJ’s inability to prepare the ground for an imminent rate hike. However, there has been a notable pickup in hawkish commentary from BoJ members, partly reacting to the weakening yen that could potentially result in stronger supply side inflation. Given that this is not the kind of inflation Governor Ueda wants, board member Noguchi reminded market participants that a December BoJ hike is still not the baseline scenario, despite chances of such a move rising from 20% to the current 34% level.

Dollar/yen continues to trade close to 156.74, with investors accepting that an FX intervention might be the faster way to reverse the current uptrend. While low liquidity days are usually the BoJ’s preferred period of intervention, with the dollar/yen firmly below the 160 level, such an action might not be on the cards this week.

Gold rally pauses, oil awaits peace talks progress

The positive correlation between equities and gold persists, with the latter quickly rising to the current level of $4,160. It is currently testing the upper boundary of the developing symmetric triangle, increasing the chance of a small drop if market conditions allow it, particularly upon positive news regarding the ongoing Ukraine-Russia peace talks.

Meanwhile, oil has climbed into the $58 area once again, as the initial optimism about a quick peace agreement has mostly fizzled out. Both Ukraine and Russia are trying to shape the final deal in their favour, risking Trump’s ire who potentially wants a ‘big win’ before year-end. While a peace agreement is not fully priced in and the announcement of positive progress would cause another oil price drop, there is increasing risk of oil jumping aggressively higher on the possibility of another failed attempt to end the 45-month long conflict.