Last week ended on a positive note where the US equities advanced to fresh highs since summer on a holiday-shortened trading week. The S&P 500 gained for the 4th consecutive week and closed the week near 4560, the rate-sensitive and technology-heavy Nasdaq 100 extended gains beyond the summer peak, and hit an almost 2-year high, while the VIX index, which is known as Wall Street’s fear gauge, or the volatility index, slumped to the lowest levels since January 2020.
The belief that the Federal Reserve (Fed) is done hiking the interest rates, and the rapidly falling US long-term yields are at the source of this optimism – especially after the latest CPI update in the US printed a softer-than-expected number, suggesting that inflation in the US fell to 3.2% last month. This week, investors will find out if the Fed’s favorite inflation gauge, the PCE index, tells the same story. The PCE index is expected to have fallen from 3.4% to 3.1% in October, and core PCE may have eased from 3.7% to 3.5% during the same month. Anything less than soothing could lead to some more correction in the US long-term yields. The 10-year yield jumped to 4.50% early Monday, though the positive pressure slowed above 4.50%.
News that the Black Friday spending jumped 7.5% this year to hit a record high of $9.8 billion certainly reminds investors that consumer spending in the US remains strong. The latter gives strong support to the US economy, which in return gives solid confidence to the Fed that keeping the rates high for long is not necessarily a bad idea. Today, the sales continue with Cyber Monday deals.
Yet the holiday shoppers’ enthusiasm is less visible on the financial markets this Monday. The US futures are down, along with their Asian peers on the back of a rebound in US yields, the nearly 8% slump in Chinese industrial profits in October and news that children in China are suffering from respiratory infections – which spurs speculation that it could be a new strain of Covid. Chinese authorities say that it’s simply a mix of known respiratory diseases. But you know, once bitten, twice shy.
The Dollar Index Extends Losses Below 200-DMA
Friday’s rebound in the US yields couldn’t give a bullish shift to the US dollar. The Dollar Index slipped below its 200-DMA, closed the week below this level, and is under renewed selling pressure this morning despite positive pressure on the yields. The broad-based dollar weakness helps the EUR/USD extend gains to 1.0950, with solid resistance seen into the 1.10 level given weaker growth perspectives for the European economies compared to the US in the coming months.
Cable trades past the 1.26 level, while the USD/JPY remains offered near the 50-DMA, near the 149 level. The yen is benefiting from rumors that a growing number of institutional players are turning long yen on the expectation that the Bank of Japan (BoJ) will one day normalize its rate policy.
Every day that goes by brings the BoJ closer to normalization and there is a great upside potential for the yen at the current levels – hence a great downside potential for the USD/JPY. Yet the right time for getting long yen is anybody’s guess. What we know however is that the upside potential in the USD/JPY is certainly limited above the 150 level.
In commodities, gold pulled out offers at $2000 per ounce and is trading above this level this morning. The softer dollar gives support to the yellow metal, yet the rebound in the US long-term yields, news of a potential extension of cease-fire in Gaza beyond today, and the fact that the precious metal is worth just shy of its ATH levels hint at a limited upside potential at the current levels.
In energy, appetite in oil is nowhere to be found this morning. The barrel of US crude trades below the $75pb level despite news that OPEC+ is nearing a resolution of the disagreement on output quotas, which led to the group delaying a crucial meeting last weekend.
Officials said that discussions with the African nations over the production quotas continue and agreement is within reach – in which case Saudi will likely announce at least 1mbpd extra supply cut to prevent oil bulls from leaving the battlefield. But oil traders need more effort to reverse the selloff in oil prices. The barrel of US crude sees strong resistance around the 200-DMA, near the $78pb level, and the price should rally past the $81pb level for the current bearish trend to reverse.