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Market in Limbo 


Flattish start to equity trading in Europe this morning after a mixed bag in Asia and not a huge amount happening though the US is back for a half-day after the Thanksgiving holiday. The FTSE 100 continues to hover just shy of 7,500 with tepid gains this morning, whilst the DAX added a small amount, but overall trade looks flat with the major indices flipping either side of the flatline in the first hour of trade. US futures look a bit firmer. German Q3 GDP was a bit better than expected, though Q4 still showing contraction. Consumer sentiment in the Eurozone’s largest economy barely improved.  China’s covid situation doesn’t improve, but this is well priced by now. 


By the Numbers 
 
Into next week we see lots of big data releases that will guide expectations for the Fed in December and what it does next. Many think it’s ready to pull the brake, with a 50bps hike. Jobs and inflation data next week will be the steer for the market though it already anticipates the Fed slowing down the breakneck pace of tightening…but as we keep saying it’s about the destination as well as the journey that matters. Obviously, Black Friday…keep eyes on retail trends going into Christmas etc, etc. The softer dollar continues to offer support to risk…everyone eyeing the equity market run-up into the year-end. One thing on the dollar is that if the Fed does slow this might provide cover for other CBs to slow, not least as dollar strength has been important factor in importing inflation. 


 
Forex Pairs still Battle Inflation 
 
Pressure still on the dollar: Sterling pushed up to a fresh three-month high at 1.2150 amid thinnish trade, before paring gains back below $1.21 this morning. The move higher ran out of steam short of the 200-day line and we might expect the next drive higher to take this level around 1.2180. The yen meanwhile has come back a bit after USDJPY tested 138.0 yesterday. The euro continues to trade above $1.04, above the 200-day line, which offers support now – need to see weekly close above for confirmation.  
 
And just when you thought inflation may have peaked...it pulls you back in. The ONS is out with a chunky revision to its PPI inflation reading for October – headline output producer prices rose 17.2% from the initial estimate of 14.8% due to an error. The peak in July was revised up to 19.7%. The annual input PPI was also revised up to 19.5% from 19.2% previously. All of which leaves the Bank of England’s relative dovishness all the more puzzling...the problem is the housing market that it daren’t crash. 


 
Bears Without a Place to Hibernate 
 
Which leads neatly to Berenberg reiterating its bearish view on UK housebuilders...says does not expect the sector-wide trough in earnings to occur until 2024. “Indeed, we do not yet believe that company valuations are attractive enough for us to turn more positive on the sector and we maintain just two Buy ratings, primarily for stock-specific reasons,” the broker says. Those buy ratings are on Berkeley Group (PT 4,500p) and on MJ Gleeson (PT cut to 470p). The rest of the sector is slapped with a hold rating. Berenberg notes affordability deteriorating materially in the housing market, models 5% decline in prices, 10% drop in volumes... sell side is too optimistic on the shape and timing of recovery. “With volume, price and margin weakness spread over the next two years, we do not expect earnings to trough until 2024,” they add.  


 
Don’t Be So Crude 
 
Oil is catching some bid with Iraq and Saudi Arabia promising additional measures if necessary to sooth the oil market. This kind of plays into the idea that with prices down still, the OPEC meeting next week is more likely to look at cuts and not increasing production. Reports earlier this week suggesting the cartel could raise production by 500k bpd were quickly dismissed by members and seem far-fetched right now. Prices would need to recover a lot more. Indeed, with crude prices falling, the reverse – more cuts – could be on the table. Either way it will be a live meeting.  

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