Retail traders beware: Sentiment fades quickly in markets

(Giles Coghlan LLB, Lth, MA – HYCM)

Some new traders, trying to trade market sentiment, end up trying to chase sentiment for too long. So, this article will help you understand what sentiment is and how long it typically lasts.

Sentiment is like a mood

Think of yourself on an average day. You tend to have days when you feel happier or sadder than others. Even within those days you have moments where you laugh, smile, or cry. In fact sometimes as people, we laugh, smile, and cry on the same day! Our moods are variable and changeable. In general, we may have ‘good’ days, ‘ok’ days, and ‘bad’ days. However, the next day our mood can often ‘re-set’. We might think yesterday was a really bad day, but today is a new day.

Market sentiment is similar

Market sentiment is the current ‘mood’ of the market. So, on Tuesday this week, the RBA shifted to a meeting-by-meeting basis which was negative for the AUD. In this instance, we knew the market mood for that day was to sell the AUD. Similarly, on Wednesday US ISM printed well above market consensus, and, as the market was so tuned into growth data, we could expect some USDJPY upside. Here is a link to the tweet sent just before the print explaining what to look for.

Market sentiment is short term

So, think of sentiment as a general rule lasting one day. This could be 2 market sessions. Then the sentiment ‘re-sets’. Now some events have more impact, but these are usually some major fundamental shifts. So, if a central bank surprised markets with a big rate hike and said that more was to come, and the market was not expecting it, then that would be a fundamental shift. However, don’t get that confused with ‘sentiment’. The sentiment is short-term.

RBA and BoE follow the Fed

The visit by US House Speaker Nancy Pelosi to Taiwan spooked markets this week as fears circulated around a potential flare-up between China and the US. However, most analysts saw this as posturing, and calm quickly returned to stocks. The Reserve Bank of Australia followed the Fed in moving to a meeting-by-meeting basis and the Bank of England did too stressing it was not on a ‘pre-set path’. Next week expect US Core inflation to be a key focus. The best opportunity will likely come from any indication that peak inflation has been and gone, so this is a ‘don’t miss’ economic data release.

Other key events from the past week

AUD: Interest Rate Decision, Aug 02: The RBA moved to a meeting-by-meeting basis this week as they want to assess incoming data before guaranteeing a commitment to further rate hikes.

GBP: Interest Rate Decision, Aug 04: The Bank of England gave a dour out-look for growth in the UK sending the GBP lower. The 2023 recession projections were brought forward to Q4 2022 and are now expected to last for 5 quarters.

Geopolitics: US, China, & Taiwan Aug 02: US House Speaker officially concluded her visitor to Taiwan on Wednesday this week in a move that had markets jittery on Tuesday. However, geopolitics tends to have a short-lived reaction in markets.

Key events for the coming week

AUD: Consumer confidence, Aug 09: After the RBA’s more dovish decision last week will the Australian consumer show signs of stress over rising inflation and higher interest rates?

Going for gold? Gold has some great seasonals in play right now.

USD: Core Inflation, Aug 10: Expectations are US Core inflation will fall to 8.9% from 9.1% y/y. However, if inflation remains high & prints above 9% the USD could find bids if investors think the Fed will still hike rates aggressively.

Read It’s not yet time for the BoE to pause let alone flip the tightening cycle

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