Weekly Summary: Positive Sentiment Is Fading

Positive sentiment in the markets is seen to be fading after the S&P 500 broad market index reached its highs last seen on September 14 at 4041 points. The end of the week overshadowed this optimism as the index dived below opening levels on Monday, testing the support level at 3900 points.

This week markets were supported by lower than-expected inflation numbers in the United States (7.7% in October vs 8.0% expected) that were released a week ago and the Producer Price Index (PPI) that came out to be 8.0% compared to 8.3% in September. Overall, the general positive market sentiment was clouded by U.S. retail sales that rose in October by 1.3% beating the forecast of 1.0%. This can be seen as clear guidance for the Federal Reserve (Fed) to continue monetary tightening without significant fears of hampering domestic demand. Fed officials have confirmed that the expectations of markets towards a lower interest hike trajectory are vastly overvalued.

Other events this week had a rather neutral effect on markets. The G20 summit flagged de-escalation efforts, as shown by the overall presence of the officials of the world’s 20  leading nations. However, considering the words of the leaders themselves, especially those of US President Joe Biden and Chinese leader Xi Jinping,  it is clear that the leaders have agreed upon certain guidelines to be followed in order to  combat tension rather than just allowing tensions to subside.

The British budget is seen to include higher taxes to finance its deficit, which is very positive for the market. This may buy some time for the Bank of England (BoE) to take a breath from hiking interest rates aggressively. But the inflation rate for October in the U.K. is at 11.1% and this may derail these efforts.

The technical picture for the S&P 500 index looks complicated as the index continues to run within the upside formation with targets at 4100-4200 points by the middle of December. However, many factors are flagging rather a return to a decline. The nearest support level is at 3880-3900 points and the nearest resistance is at 3980-4000 points. So, the distance between these levels is the most likely scenario for the index now. Downside targets are far below at 2000-2200 points.

Brent crude prices failed to settle above $96 per barrel and slipped to the $90 support level. This makes testing $85-87 per barrel the basic scenario.

Gold prices have ran out of steam reaching the peak of $1786 per troy ounce. Prices rolled back to $1760 per ounce and are seen to be ending this week close to this level. Without any upside drivers next week’s prices may drop to the $1710 support level, and in case of a breakthrough they may go even deeper to $1600-1650 per ounce.

The money market continues to experience elevated volatility that prevents the use of short-term signals. So, it is better to place orders considering longer perspectives. Short trades for AUDUSD that were opened at 0.63700-0.64200 are still on the go, and may be terminated when the pair  reaches the 0.59000 area.