Markets see Sharp Declines Followed by New Highs

The US CPI figure has finally been confirmed and it’s much higher than markets had expected. This originally prompted a strong sell-off in equity markets but prices then unexpectedly recovered and increased to a 1-week high. Over the past 48 hours, the US has released 3 inflation related indexes - the CPI, Core CPI and PPI.
All three have indicated that inflation is unlikely to have peaked or at least is not declining at the rate economists would have liked. Economists have also predicted that October’s CPI figure is unlikely to show negative figures considering the rise in the cost of fuel that we’ve seen in the first 2 weeks of October.
The market showed a strong “risk on” sentiment towards the end of yesterday’s US session, which has also continued this morning. Both US and European equities have risen along with Asian stocks, but traders should keep in mind that the assets had been declining for six consecutive trading days. Strong buyer sentiment can also be seen in other markets such as energy. Crude oil increased by 4.30% after a short lived decline. So what is behind the bullish price movements?

S&P 500

When looking at the price movement of S&P 500, we can see a clear indication of panic selling which brought the price down almost to a 2-year low. After the release of the US CPI and Core CPI figures, the asset declined by 4.0% within only 75 minutes. However, it then managed to fully correct and even cross into a new weekly high. The bullish movement measured 5.88% and formed clear higher highs and higher lows. When looking at oscillators, traders are getting clear signals that the price is ‘oversold’ but they have had no confirmation from the price as of yet. SNP500 1-hour chart on October 14th
So what caused the decline as well as the rise in bullish sentiment? The CPI figure was predicted to come in at 0.2% and the Core CPI at 0.4%. However, the Bureau confirmed that the CPI was double that expected and the Core CPI was at 0.6%. The day before also showed that the PPI had increased from -0.1% to 0.4% in September. 

Economic figures released over the past 48 hours have caused investors to fear that the Federal Reserve will continue to increase rates for more than just 1 or 2 months. It is now almost certain that the regulator will choose to increase the rate by 0.75% and possibly even opt for a record 1% hike. 

The combination of high inflation and restrictive interest rates can be detrimental to consumer spending, company profits, and, of course, the US stock market. However, investors are questioning why the price of S&P 500 and stocks in general corrected so strongly after the release. Economists have advised that it could potentially be related to “short covering” and pending orders being triggered. Both indicate that the upward price movement is temporary, but it is vital that traders continue with their own price analysis.

USD/JPY

The USD/JPY pair increased in value by a further 0.30% this morning and has formed its 8th bullish consecutive day. Over the 8-day period, the exchange rate has increased by 2.30% and managed to consecutively break into a new price high. When looking at technical indicators, we can see clear signals that the price is within an upward trend which could continue but that the price may also be ‘overbought’. However, investors are extremely cautious that the Japanese Federal Government does not once again opt to intervene in the currency market. USD/JPY 12-hour chart on October 14th
Finance Minister Mr Suzuki confirmed that Japan is ready to conduct another foreign exchange intervention in the event of a significant weakening of its national currency. We, of course, do not know at what price this intervention may take place but some have speculated it may be at 151.000. Of course, an intervention can create a lot of unnatural volatility and risk for leveraged traders.

Quick Summary:

• US stock market witnessed a strong sell-off but prices then unexpectedly recovered and increased to a 1-week high. Find out how to invest in real stocks.
• US CPI for September was 0.4% and the Core CPI 0.6%. Both came in higher than expected.
• Investors expect a the next Federal rate hike to be at least 0.75%
• Japanese Finance Minister confirms that they are ready to conduct another foreign exchange intervention should they deem it necessary.