My suspicion for equity trading this month is that it's been heavily influenced by fund redemptions and tax loss selling. Normally, you would see tax loss selling wrap up by Dec 15 but I believe many sellers were expecting a Powell-inspired rally to sell into. Instead, he was hawkish and that left many tech stock holders stuck selling into a bad market.
At the same time, many people saw this coming months ago and have been waiting to buy the tax loss dip. I think we're finally seeing the buyers outweigh the sellers today and the positive price action adds to the signal.
With that, risk assets like CAD and AUD are getting some help alongside stock markets. In addition, a 2.5% rally in crude and a small rebound in natural gas are helping the loonie.
At the same time, USD/CAD is only down 13 pips on the day while AUD is up much more. What gives? I think the answer lies in today's CPI report, which was hotter than anticipated. Normally that would be good for a currency but in the current environment it's bad. That's because it could tilt the Bank of Canada towards another rate hike at a time when the housing market is wilting. So those positive financial flows on better CAD carry are likely to be outweighed by risks around a housing decline and subsequent consumer pain, leading to a broader drop in Canadian asset prices.
CIBC highlighted the risks after the CPI report:
The good news is that inflation is easing, and that will become more noticeable when the big monthly increases seen this spring start to drop out of the annual calculation next year. However, the bad news is that it is slower progress than we and maybe even the Bank of Canada was hoping for. We still expect no change in interest rates at the January meeting, although it would be nice to see a deceleration in some core measures of inflation in next month's release to be more confident in that call.
