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Opening Bell: Stock Rally Fizzles Ahead Of Fed Day, Saudi Aramco IPO

By Pinchas Cohen/Investing.comMarket OverviewOct 29, 2019 05:15AM ET
www.investing.com/analysis/opening-bell-stock-rally-fizzles-ahead-of-fed-day-saudi-aramco-ipo-200479325
Opening Bell: Stock Rally Fizzles Ahead Of Fed Day, Saudi Aramco IPO
By Pinchas Cohen/Investing.com   |  Oct 29, 2019 05:15AM ET
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  • U.S. futures edge lower, giving up Monday's fresh records

  • European shares drop as investors make space for Saudi Aramco ahead of Sunday's IPO

  • Treasurys jump, signaling expectations the Fed will halt cuts after Wednesday

  • Palladium hits record high on stricter air-quality laws

Key Events

Futures on the S&P 500 and the Dow dropped alongside European stocks this morning, while tech contracts on the NASDAQ 100 clung onto positive territory for a little longer, capitalizing on the fresh record highs hit by U.S. equities on Monday.

The S&P 500 (+0.56%) and the NASDAQ 100 (+1.01%) posted new all-time highs as risk-on surged on the back of bullish signals for a trade resolution between the world’s two largest economies—with U.S. President Donald Trump expecting to sign a "very big portion" of the future trade deal with China ahead of schedule.

Also helping the rally was a over 90% consensus for another quarter-point rate cut by the Fed, which is increasingly seen as keen on sustaining financial markets.

We see this optimism as surprising, considering Fed Chair Jerome Powell consistently tied central bank stimulus to the U.S.-China trade dispute's fallout—while insisting that the latest round of cuts was nothing more than a mid-cycle adjustment, rather than the start of a more structured accommodative strategy against an economic slowdown.

Now that trade negotiations are reported to be back on track, we’d expect investors to be doubtful about a third, consecutive interest rate cut. However, one important counter-argument is that, historically, the Fed has never disappointed market expectations when they were so strikingly one-sided—pinning a 96.2% probability of a rate cut by mid European morning.

We would still argue that the Fed is unlikely to cut rates any further after Wednesday, if bond traders' moves —signaling a retrenchment in future rate cut expectations—prove right. What will that mean for U.S. stocks, which are hovering at record highs in large part based on the Fed's policy easing, on top of better-than expected corporate results and trade hopes?

Meanwhile, Europe's STOXX 600 slipped lower, with financial services shares underperforming. The pan-European index erased one and a half sessions of gains, after posting six straight days of winnings that brought the benchmark near a two-year high.

The drop is likely to have been also spurred by the announcement, by Saudi Arabia's state oil company—and the world's most profitable—that Saudi Aramco is finally kicking off its long-awaited Initial Public Offering on Sunday, prompting portfolio managers to shed some existing holdings in order to make room for the new stock.

In the earlier Asian session, regional equities were a mixed bag, with China’s Shanghai Composite (-0.87%) and Hong Kong’s Hang Seng (-0.39%) closing in the red after Hong Kong’s leader Carie Lam warned that months of political protests are taking a harsh toll on the city's economy.

Global Financial Affairs

S&P 500 Daily Chart
S&P 500 Daily Chart

Yesterday, U.S. shares resumed a rally, with the S&P 500 sealing a double record on a closing and a high basis. Technically, the price created a breakaway gap and completed an ascending triangle—both bullish.

DXY Daily Chart
DXY Daily Chart

Treasurys jumped with the dollar. Technically, the greenback is struggling against the 100 DMA for the third day, as it may be developing a rising flag, bearish after the preceding drop.

EUR/GBP Daily Chart
EUR/GBP Daily Chart

The pound edged lower against the euro as it formed a pennant continuation pattern, bearish after the preceding drop, as U.K. Prime Minister Boris Johnson kept pushing for an early election in December even after formally accepting the EU's offer of a Brexit extension until Jan. 31 2020.

Palladium Monthly Chart
Palladium Monthly Chart

In metals, palladium traded near the record high it achieved yesterday on expectations that stricter air-quality regulations in Europe and China will boost demand for the metal, which used in vehicles' pollution-control devices.

Gold strengthened despite the stronger USD, along with the yen.

Up Ahead

Market Moves

Stocks

  • Japan’s TOPIX jumped 0.9%.
  • The MSCI Asia Pacific Index climbed 0.5%.
  • Currencies

  • The Dollar Index rose 0.12% to the highest since Oct. 16.
  • The pound edged higher versus the euro.
  • The euro decreased 0.1% to $1.1086.
  • The South Korea’s won climbed 0.6% to 1,163.19 per dollar.
  • Bonds

  • The yield on 10-year Treasurys slid one basis point to 1.83%.
  • Britain’s 10-year yield fell one basis point to 0.708%.
  • Germany’s 10-year yield slipped one basis point to -0.34%.
  • Australia’s 10-year yield ticked nine basis points higher to 1.1855%.
  • Commodities

  • The Bloomberg Commodity Index was little changed at 79.45.
  • Gold rose 0.1% to $1,494.01 an ounce.
  • West Texas Intermediate crude dropped 0.8% to $55.34 a barrel.
  • Opening Bell: Stock Rally Fizzles Ahead Of Fed Day, Saudi Aramco IPO
     

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    Opening Bell: Stock Rally Fizzles Ahead Of Fed Day, Saudi Aramco IPO

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    Comments (2)
    Nick Burns
    Nick Burns Oct 29, 2019 8:47AM ET
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    is the fed bond auction flooding the market with supply and banks not buying right now at year end going to drive the bond markets down more and what will that mean for equities being indexes at ath?
    Pinchas Cohen
    Pinchas Cohen Oct 29, 2019 8:47AM ET
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    In a zero sum game it would do what they Fed intends for it to do, support all time highs.However, with so many things that can go wrong at such a fragile condition, with so much riding on trade, the global economy, Brexit, Iran, Trump, who can tell what will actually happen?
    lubomir zavodny
    lubomir zavodny Oct 29, 2019 7:55AM ET
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    thanks
    Pinchas Cohen
    Pinchas Cohen Oct 29, 2019 7:55AM ET
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    You're welcome.
     
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