The previous week marked a significant shift in market sentiment regarding Federal Reserve (Fed) rate hike expectations. The latest Consumer Price Index (CPI) update revealed a slower-than-anticipated inflation rate in the US, coupled with politicians averting a government shutdown. Despite these factors, the US 2-year yield tested 4.80% for the fourth time, while the 10-year yield briefly dipped below 4.40%. The term premium on the US 10-year paper, which surged to 50 basis points the previous month due to hawkish Fed expectations, political risks, and increased government bond supply, has nearly vanished amid the recent rally. This suggests that, at current levels, investors may require renewed conviction to sustain buying momentum.
Attention is now focused on the closely watched US 20-year bond auction, considering the recent weakness in the 10 and 30-year bond auctions. The outcome may influence a potential rebound or continuation of the rally in US bond yields. The minutes from the latest Federal Reserve (Fed) policy meeting, set for release tomorrow, will likely emphasize that the Fed's decision to pause rate hikes was influenced by the rise in US long-term yields in October. With the subsequent decrease in yields, interpretations may vary, either signaling Fed caution due to falling yields or a belief that inflationary pressures have subsided, leading to a halt in rate hikes.
All Eyes on Nvidia
The S&P 500 closed above the psychological level of 4500, and the Nasdaq 100 approached its summer peak ahead of Nvidia (NASDAQ:NVDA)'s earnings announcement. Nvidia has experienced substantial gains with expectations of a significant revenue increase in Q3. The stock price has been up 240+% since the beginning of the year, and 350+% since October 2022. The company predicted that its sales would soar to $16bn last quarter. A wide gap between demand and supply should keep Nvidia on track for extended growth. But any deviation from optimistic projections could trigger heavy profit-taking.
Elsewhere, US stock optimism extends globally, with the European Stoxx testing the 200-DMA resistance and the Japanese Nikkei reaching a 33-year high. Japan's supportive central bank, a cheap yen, and strong company earnings contribute to investor interest.
FX and energy
The USD/JPY fell below the 50-DMA and the EUR/JPY retreated from a record high. There is one reasonable direction for the yen at the current levels: a positive correction. But no one knows when the Bank of Japan’s (BoJ) astonishing pushback against normalizing policy will end. Japan is expected to announce a rise in inflation to 3% this Friday.
The EUR/USD extends gains above 1.09 this morning on the back of a broad-based UUSD selloff. The next target for euro bulls is 1.10, contingent on sustained USD weakness. However, the US Dollar Index flirts with oversold conditions and tests critical 200-DMA support, indicating a potential pause in the ongoing dollar selloff absent fresh news.
In energy, US crude recovers as speculation that OPEC could extend production cuts throws a floor under the recent selloff. The next OPEC meeting is scheduled for November 26th and Saudi considers doubling its 1mbpd supply cut. It’s a risky move and it could go both ways. Oil prices are trending lower today because of a weakening global outlook. Therefore, whether this move – in hurry -attracts buyers or exacerbates the current global economic concerns remains to be seen. Monitoring this week's price action will provide insights into whether to sell a potential post-OPEC rally or seize opportunities on a bullish trend. If the excitement regarding Saudi doubling its supply cuts can’t push the price of a barrel above $80-81pb range, it’s probably better to sell the tops.