As the seasonal impact of the US Thanksgiving holiday on both US and international markets wears off, liquidity will turn around from this week to the following. Next week’s economic calendar is jam-packed with critical inflation data, readings on economic activity, and the perennially popular NFPs. The overall “risk appetite” trends have risen.

Investors may be defrosting their Thanksgiving turkeys and clipping coupons in preparation for Black Friday instead of getting ready for trading on Thursday. Thanksgiving and Black Friday fall this year following two days of stock market advances.

On Friday, following the publication of the minutes from the Federal Open Market Committee meeting earlier this month, European markets were flat to end a positive week. 

The minutes which suggested that the Fed may become less aggressive with rate hikes going forward, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all ended the day on Wednesday with gains.

Here is the fundamental forecast of major global markets.

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The US S&P 500: Bearish

A market that has experienced both a seasonal and structural suppression of volatility will see liquidity return the following week. There is no guarantee of quietness, even though the end-of-year holiday season usually heightens anticipation for a tapering off of activity and participation.

Maintaining enthusiasm can become progressively expensive given the unsolved and convergent dangers of rife inflation, recession fears, and the lagged effect of growing financial market tightening.

The decline in implied volatility (also known as “anticipated”) volatility for the benchmark S&P 500, the most actively traded index from the biggest market in the world, coincides with the rocky recovery during the previous six weeks.

S&P 500 Overlaid with VIX Volatility Index (Weekly)

Corrections to established trends do occur, and there have been headlines that have offered some encouragement, such as the remarkable elation that followed the modestly softer CPI pace at the beginning of the month or this week’s FOMC minutes that reiterated the likelihood of a slower rate of hikes. 

That might be sufficient to go a little further, but it doesn’t serve as the basis for a sincere rally going forward.

Data items from the US calendar for the upcoming week include the PCE deflator (the Fed’s preferred inflation indicator), Conference Board consumer confidence survey, and November NFPs.

The odds of the data considerably lowering the Fed’s terminal rate or preventing a recession, though, are slim. This distorts the likelihood of the data reversing the current negative trend compared to the headlines indicating respite. 

The UK FTSE 100: Neutral

The Chancellor of the Exchequer issued his own economic warning along with a tighter budget in just a few short weeks, the Bank of England forewarned of a painful UK recession. 

Further, the OECD warned that the world’s fifth largest economy was suffering from both internal and external (energy costs) pressures. 

We have combined the UK index with the 10-year / 2-year Gilt yield spread as an investor-monitored indicator of economic prediction using a more widely used US gauge. Although the measure is less frequently used for UK markets, the idea is the same.

FTSE 100 Overlaid with the UK 2-10 Gilt Yield Spread (Weekly)

The Chancellor of the Exchequer issued his own economic warning along with a tighter budget in just a few short weeks, the Bank of England forewarned of a painful UK recession. 

Also, the OECD warned that the world’s fifth largest economy was suffering from both internal and external (energy costs) pressures. But if you only looked at the FTSE 100, you wouldn’t get that sense.

We have combined the UK index with the 10-year / 2-year Gilt yield spread as an investor-monitored indicator of economic prediction using a more widely used US gauge. Although the measure is less frequently used for UK markets, the idea is the same.

Can the markets resist this commonly anticipated trend of economic adversity? The only scheduled provocations on the economic docket are a report on private retail sales, consumer credit trends, and housing inflation. 

This might leave the market vulnerable to changes in sentiment around the world or erratic headline material.

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The German DAX 40: Bearish

Even while the differences in equities performance and economic projection for the UK markets are striking, the comparison to the main mainland Euro-area benchmarks is in a league of its own.

While the FTSE is further from its year-opening highs than Germany’s DAX 40, the former’s 7-week rise of more than 20% reflects optimism that is very different from the overall fundamental background.

Even though the official prediction is for a US-matching and weak 0.5 percent growth, the Eurozone received the OECD’s strongest warning over the threat to the economy in 2023. The same group had also urged the ECB to reduce the rate differential with the US counterpart in order to prevent inflation from spiraling out of control.

DAX 40 Overlaid with the 2-Year Eurozone Bond Yield (Weekly)

We have German, and Eurozone inflation data, regional attitude polls, and employment reports on the schedule for the upcoming week. If these facts indicate an imminent recession, previously held confidence may start to wane substantially.

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Japan’s Nikkei 225: Bearish

The domestic capital market in Japan can be a little segregated. Although it is still susceptible to changes in global sentiment, there has been a reduction in the degree of “risk off,” particularly with regard to 2022.

This is made possible by a local investment appetite that favors bigger capital gain potential above the financial system’s persistently deflated baseline of yield, provided that the Bank of Japan has adhered to its pledge to maintain interest rates anchored at virtually zero.

Nikkei 225 Overlaid with the USD JPY Exchange Rate (Weekly)

The Nikkei 225 may revert to trading towards the low end of this year’s range if there is a big decline in the global mood or if Japan’s economy continues to shine (down to 25,150 – 24,500). The index may even be forced into “bearish” territory, something it has so far managed to avoid.

On Tuesday, the Japanese docket will present data on retail sales and unemployment, on Wednesday, data on industrial production and housing starts; and on Thursday, data on 3Q capital investment.

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