AI and High-Tech Confidence Fuel Equity Markets

Global equity markets were mixed overnight with markets posting gains outnumbering the markets showing weakness. Despite the prospect of noted early strength in US equities, a risk off environment remains in place with gold up nearly $100 an ounce overnight! Critical economic news at the end of last week included better than expected Canadian net change in employment, much weaker than expected Italian industrial output, stronger-than-expected University of Michigan consumer sentiment for October, a 8.3% increase in Chinese September exports and a 7.4% increase in Chinese September imports. Looking ahead the trade will be presented with an OPEC monthly market report, German current account readings for August and the unlikely release of a “scheduled” US monthly budget statement for September! In fact, with the US government shutdown remaining at an impasse, the president has threatened to take advantage of the situation by severely cutting Democrat legislative spending priorities.

STOCK INDEX FUTURES

Apparently, the rare earths flap between the US and China combined with recent evidence of global slowing has been more than offset by the “Peace deal” as US equities are showing sharp gains in the early action today. While it is possible the equity markets are benefiting from a lack of alternative investments and FOMO (fear of missing out) we view the early October rally with residual skepticism especially given the markets have already widely anticipated two US rate cuts before the end of the year. Nonetheless, the equity markets continue to benefit from AI and high-tech optimism, especially given the recent large exports of Nvidia chips. Given the massive washout in stock prices on Friday the strong initial rally today is likely being accentuated by technical balancing from the massive collapse Friday. In fact, the equity markets closed near spike low territory on Friday negating some of the potential for a very strong bottoming signal. Furthermore, the hard washout was forged on the strongest non-rollover trading volume since April giving the wash technical credence. According to Bloomberg coverage this morning, US stock futures are benefiting from softer US trade talk from the president on over the weekend where he indicated “the US does not want to harm China”. However, on Friday in the wake of the Chinese rare earth export ban announcement and the knowledge of a sharp drop in Chinese September rare earths, the US president threatened an additional 100% tariff on China and that largely contributed to the market’s washout. In general, the bias in stocks remains up with AI optimism, Middle East peace hope and rate cut fever leaving the bulls with the edge.

CURRENCY FUTURES

While the US dollar has setback from the multi month high posted last week, we see the fundamental and technical bias pointing upward. However, gains should be hard-fought and difficult to sustain given a lack of US scheduled data, the potential for out of nowhere fresh trade threats from the White House and given further congressional squabbling. Therefore, fresh/would be Dollar longs should wait for a correction in the December dollar back down to 90.34 before entering the long side. Clearly, the dollar has managed to discount widespread anticipation of two rate cuts in the US before the end of the year. Another support for the dollar are signs flowing from the euro options trade which has built the third most aggressive bearish position in three years! With the dollar remaining strong in the face of widely entrenched expectations for further US rate cuts we think the euro is being pressured by those who believe the ECB will be “late” in supporting their economy. Some in the trade think the explosive upside action in gold and silver will undermine the dollar as was seen in the precious metal markets early on Friday.

INTEREST RATE MARKET FUTURES

After an upside breakout to the highest level since September 17^th, treasury prices have started out slightly weaker from a combination of technical balancing and notable early gains in US equities. However, a slowing bias generally remains in place despite a vacuum of economic data from the US. However, on Friday the University of Michigan one year inflation expectations index registered a slight downtick while consumer expectations ticked lower and that should provide some fundamental support to Treasury prices. After a slight measure of optimism toward US/Chinese trade negotiations a couple weeks ago, last week China indicated they would severely restrict the export of rare earth metals and that in turn has been met with fresh counter threats from the US. Threats by China to restrict rare earth exports were given significant validation with a sharp 31% drop in Chinese September rare earth exports. With a lack of US scheduled data this week, the treasury trade is likely to focus on foreign scheduled data and Fed dialogue. The short-term technical bias is up with general fears of slowing and mixed inflation signals leaving the path of least resistance pointing upward in prices. In fact, the CME Fed watch tool this morning has a 96% chance of an October rate cut and nearly 90% prospects of a December rate cut. However, from a very short-term perspective treasury bond prices are slightly overbought from last week’s low to high rally of nearly 2 ½ points and from the treasury note rally of one point.

Interested in more futures markets?  Explore our Market Dashboards here.