Oil prices surge to two-week winning streak as Iran supply fears grip markets
As the year comes to a close, with just about two weeks left, I’ve decided to take some time away. Today’s edition will be the last one for 2025.
That said, I’m not the type to leave anyone hanging. I know many of you look forward to reading my thoughts, so if something significant is happening in the market, I’ll be more than happy to return sooner.
This week will be anything but boring. On Thursday morning, we have rate decisions from the ECB and the BOE, followed by the BOJ on Thursday evening into Friday. There is likely to be plenty of news flow, and with NikkeiAsia already reporting that the BOJ is set to raise rates for the first time in 11 months, a decision not to hike would be a major surprise.
Historically, news has tended to leak ahead of BOJ meetings, limiting surprises. In addition, Reuters has reported that the BOJ is likely to pledge to continue raising rates.
If that proves to be true, it could have a significant impact on the yen. And if the USD/JPY five-year forward chart is correct—and a bull flag is indeed forming—then a breakout in the forward rate would suggest a meaningfully stronger yen lies ahead.
Meanwhile, over the past week, there has been increasing discussion about the ECB potentially raising its growth forecast and the possibility of rate hikes in 2026. This meeting could help frame that debate. Such a shift would be meaningful and would likely support a stronger euro if it were to materialize, and perhaps more importantly, higher interest rates across Europe.
Notably, the Italian 10-year yield chart appears to be forming an inverse head-and-shoulders pattern and is approaching a break of a short-term downtrend. If improved growth prospects and the potential for future rate hikes are mentioned, a breakout in the Italian 10-year yield becomes increasingly plausible.
Let’s not forget this week we also have the Bank of England meeting on Thursday morning. A rate cut is widely expected, but the bigger question is what comes after. Inflation in the UK remains elevated, while growth is essentially nonexistent, creating a genuine stagflation challenge.
The BOE can continue cutting rates if it chooses, but that may come at the expense of the 10-year gilt. The 10-year yield appears to have formed a large ascending triangle pattern, and a breakout looks increasingly likely in the near term.
Additionally, the US jobs report is on Tuesday, with payrolls expected to increase by just 40,000 in November and the unemployment rate projected at 4.4%. Revisions will matter, though. Then on Thursday, the November CPI report is due, with both headline and core inflation expected to rise 0.3% month over month and 3.0% year over year.
The 30-year Treasury yield broke out on Friday, moving above resistance and its downtrend near 4.8%. I still believe it is heading toward 5%, possibly even by the end of the coming week. If global interest rates are poised to rise, it will be difficult for U.S. rates not to follow, regardless of whether the Federal Reserve cuts.
We are at an important point in the cycle for the yield curve. It is clear that the curve is steepening, and historically—going back to 1955—periods of yield-curve steepening have not been favorable for the stock market. This has been true during both bull and bear steepeners, whether in more recent history or in the periods before 1980.
Based on where the 10-year minus 3-month spread currently stands, there appears to be substantial additional steepening still ahead.
This week is also opex, and if the S&P 500 falls below 6,800, there isn’t much support below it. The put wall doesn’t even kick in until 6,500. If the bull can’t get together and defend 6,800 on Monday, the index will most likely flip into a negative-gamma regime and head sharply lower.
(optioncharts.io)
The technical chart essentially confirms what the options market is saying.
See you in 2 weeks.