In early October, some investor positioning and sentiment readings undershot the 2008 lows, as we highlighted back then. The typical recovery ensued – against the disbelief of the crowd. Last week, the upswing got a major boost from momentum breaking to the upside. Fundamentally, the US Federal Reserve (Fed) pivot did not materialise, as the Fed chair seems to be on a Volcker-esque mission to be done with inflation once and for all.

What pivots have occurred?

While the outcome of this is quite open, two other pivots materialised: first, inflation prints not only turned the corner (contrary to what they stubbornly refused to do in the past months), this time around they even undershot expectations, which is pretty much unheard of in the current crazy inflation cycle. The other pivot came from China, where policymakers finally conceded that the economy and the housing market, in particular, need help to keep them from free-falling.

Moreover, the population needs a perspective on the zero-Covid-19 strategy as well. On top of that, this week might even see a third pivot: the G20 meeting in Bali, Indonesia, may soften (or even bridge) some of the fault lines that have opened up in the global landscape over the past years.

Most notably, the relationship between the two largest players in the field, the US and China, may take an intermediate turn for the better. What this means for the shattered ties in the long run remains to be seen, of course. But from a shorter-term perspective, this may be good enough to bring back some confidence into geopolitics.

Of course, in the meantime, markets are no longer oversold. That is the usual dilemma for investors: buying opportunities hardly occur when it feels comfortable. Yet, in our view, this upmove has legs. Moreover, the good news is that you do not have to go all in when it comes to taking risks at this juncture. A lot of quality issuers are attractively valued by now.

US inflation: Softer reading brings major relief

Meanwhile in the USA, the latest inflation figures delivered a major relief by being lower than expected, allowing the US Federal Reserve (Fed) to reduce the pace of its rate hikes. Inflation slowed in October for the fourth month in a row to 7.7% and the core inflation rate declined to 6.3%. Both numbers were lower than expected. At the same time, petrol prices were higher in October and prices for shelter continued to grow at high rates. We expect shelter inflation to move lower in the coming months, albeit rather slowly, following already falling lower house prices and an alternative measure of rent inflation.

Meanwhile, the Fed remained cautious about declaring victory over inflation, as signals of a pivot could counter its efforts to slow the economy and bring inflation down. Our conviction of a smaller rate hike of 50 basis points at the next Federal Open Market Committee meeting in December has increased, as that would be in line with the Fed’s lasting desire to hike rates while acknowledging that past rate hikes are beginning to bite.

What about currencies?

The peak in US inflation increases the chances of a USD strength peak and, consequently, the euro could strengthen. We assume that the EUR/USD has left its low point of slightly below 0.96 behind. The headwind for the euro from an increased rate disadvantage will become less severe.

At the same time, the euro is missing clear support. We doubt that the European Central Bank will hike rates aggressively, as growth risks are increasing. Further, energy prices have pushed the eurozone current account into deficit, limiting the euro’s upside in the short term.