The previous week marked a significant shift in market sentiment regarding expectations of a Federal Reserve (Fed) rate hike. The latest Consumer Price Index (CPI) update revealed a slower-than-expected inflation rate in the US, along with politicians fending off a government shutdown. Despite these factors, the US 2-year yield tested 4.80% for a fourth time, while the 10-year yield briefly dipped below 4.40%. The futures premium on the U.S. 10-year note, which rose to 50 basis points last month on hawkish Fed expectations, political risks and increased government bond supply, has all but disappeared during the recent recovery. 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 Treasury auction, given the recent weakening of the 10- and 30-year Treasury auctions. The result may affect the potential rebound or continuation of the rise in US bond yields. Minutes from the Federal Reserve’s (Fed) latest meeting, due out tomorrow, are likely to highlight that the Fed’s decision to hold off on rate hikes was influenced by the rise in US long-term yields in October. With the subsequent decline 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 4,500 level and the Nasdaq 100 neared its summer peak ahead of Nvidia’s earnings announcement. Nvidia posted strong earnings with expectations for a significant increase in revenue in the third quarter. The stock price is up 240+% year-to-date and 350+% since October 2022. The company forecast its revenue to rise to $16 billion last quarter. A large gap between demand and supply should keep Nvidia on a longer growth path. However, any deviation from optimistic projections could trigger major profit-taking.
Elsewhere, optimism for US stocks extends globally, with Europe’s Stoxx testing 200-DMA resistance and Japan’s Nikkei hitting a 33-year high. The Bank of Japan, a cheap yen and strong corporate earnings are contributing to investor interest.
FX and Energy
USDJPY fell below the 50-DMA and EURJPY retreated from record highs. There is one reasonable direction for the yen at current levels: a positive correction. But no one knows when the Bank of Japan’s (BoJ’s) stunning pushback against normalization policy will end. Japan is expected to announce an increase in inflation to 3% this Friday.
EURUSD extends gains above 1.09 this morning due to extensive USD selloff. Another target for Euro bulls is 1.10 depending on sustained USD weakness. However, the US dollar index is flirting with oversold conditions and testing the critical 200-DMA support, suggesting a potential pause in the ongoing dollar sell-off without fresh news.
In energy, U.S. crude is recovering as speculation that OPEC could extend production cuts falls below a recent selloff. OPEC’s next meeting is scheduled for Nov. 26, and Saudi Arabia is considering doubling its supply cut of 1 mbpd. It’s a risky move and it can go either way. Oil prices are falling today due to a weakening global outlook. Whether this move – in a hurry – will attract buyers or exacerbate current global economic concerns remains to be seen. Watching this week’s price action will provide insight into whether to sell the potential post-OPEC rally or take advantage of the uptrend. If excitement about Saudi Arabia doubling its supply fails to push the price of a barrel above the 80-81pb range, it is probably better to sell the tops.