This week started with a bit of a startle as mass protests erupted in China against the zero tolerant COVID-19 policy. Students in Shanghai and Beijing called on Xi Jinping to resign. The Kuomintang, the opposition of the ruling party that is pro-independence of Taiwan, won local elections on the separatist island over the weekend.
Markets are reacting by lowering their appetite for risk. The S&P 500 broad market index futures fell by 0.5-0.8%. Brent crude prices splashed down below the crucial support level of $83-84 per barrel, signaling further moves downwards as they are approaching $81 per barrel. The U.S. Dollar index is sitting on the support level of 105 points while the Japanese Yen is gaining traction at its current position of 137.60 against the Dollar, pointing to the market's appetite for risk.
As for the protests in China, they are unlikely to become a one-time show. The same could be said about political activity in Taiwan. Markets fear that political tensions in mainland China may nudge Xi Jinping to seek a heavy-handed approach to the issue of Taiwan as people in Taiwan are seeking peace in cross-Taiwan Strait relations. Such a scenario may be surprisingly shocking to investors, so it should be monitored closely.
Investors are waiting for the release of macroeconomic data this week. If political tensions ease by the middle of the week macroeconomic issues would come into focus starting with the testimony of the Federal Reserve’s (Fed) Chairman Jerome Powell on Wednesday. Investors are betting that the Fed is set to raise interest rates by 50 basis points in December but are still waiting for Powell to confirm this. Powell’s speech would be accompanied by the U.S. GDP data for Q3 2022, and the first estimate of November Non-Farm Payrolls presented by ADP. The Core Personal Consumption Expenditure Price Index (PCE) in the U.S. will be published on Thursday. That is considered to be one of the major guiding stars for the Fed in terms of inflation. The Bank of England (BoE) is planning to start selling gilts for $23.2 billion that were acquired to stabilise markets during the political crisis in the United Kingdom in late September and the first half of October. Friday will be marked by the official Non-Farm Payrolls data. The S&P 500 index is expected to perform elevated volatility within the 3980-4080 area without any particular direction.
The oil market is moving according to the recession scenario as Brent crude prices are heading to the next support at $78-80 per barrel after sliding below the support of $83-84 per barrel. Targets are set at $60-70 per barrel. With this in mind, the oil market is becoming a guideline for all markets.
Gold prices are rising in line with geopolitical tensions to $1761 per troy ounce. This new trend may easily break the downside scenario that was previously developed. So, it would be better to look for long positions, but entry points are still unclear.
The money market continues to experience elevated volatility that prevents the use of short-term signals. So, it is better to place orders that are attached to 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. These operations should be terminated at December 1.