STATE OF THE MARKETS

Stocks rally on short covering. US stocks rallied on Thursday even after news of rising Producer Price Index and stubborn inflation. News of inflation YoY declined to 8.2% from 8.3% but higher than market estimates of 8.1%, sent investors bidding stocks higher to cover prior shorts. Dow (+2.83%) climbed the most, followed by S&P (+2.60%), Russell (+2.41%) and Nasdaq (+2.23%) as the Dollar fell and closed near the 112.50 minor handle. Short covering triggered losses in bids for bonds, sending yields higher, with the 10Y benchmark piercing 4.08% before settling around 3.95%.

In the commodity markets, crude dipped to $84.50/bl but rebounded and closed above $88.10/bl after news of low diesel inventory that triggered ahead of winter buying. Fears of further rate hike pushed gold below $1,642.35/oz before bidders emerged to settle the yellow metal around $1,666.10/oz. Elsewhere, iron ore continues to drift lower near $95.40/tn as global recession fears choked demand.

In the FX space, Sterling seized the helm of demand in the medium term after the Bank of England reverted its bond buying decision, while demand in the short and long term remained stable. Sentiments seemed more bullish as demand for the safe haven Swiss and Yen pulled back across all horizons.

On Friday, markets expect a more volatile session as banks and money centers started to release their earning reports. Actions today seemed to signal bullish sentiments but also see rising probability of another hike in December. Earnings to watch include United Health (UNH), JP Morgan (JPM), Wells Fargo (WFC), Morgan Stanley (MS), Citigroup (C), PNC Financial (PNC), US Bancorp (USB) and First Republic Bank (FRC) as well as the latest numbers in US retail sales, import/export prices, business inventories and consumer sentiments.

OUR PICK – No New Picks

No new picks going into the weekend. Investors continue to exit the equities (-$3.6 billion) and taxable bonds (-$4.8 billion) while piling into the higher yield short term money markets (+$7.6 billion) as the shorter term notes yield more than 4% now. As of writing, notes of 1Y (4.42%), 2Y (4.41%), 3Y (4.38%), 5Y (4.13%) and even the 7Y (4.03%) yields more than the 10Y (3.88%) and 30Y (3.88%). These inversions are signs that the US markets are in haywire alongside the UK markets as evident by the BoE intervention in the bonds market. With 5 and 10 years spreads now favoring the gilts, we might see resiliency in Sterling.

Trades updates: 

Equities:  VIPS (41% undervalued with 3.92 z-score), WBA (36% undervalued, 5.95% yields), SQ (about fairly valued with 4.96 z-score), T (12% undervalued, 7.01% yields) and M (44% undervalued, 3.59% yields) rebounded this week while CRON (29% undervalued with 23.21 z-score) and AUY (22% undervalued, 2.41% yields) fall back under pressure.

FX & Commodities: USD/CAD was stopped out and CAD/JPY reached short term TP1.

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