US Equities Showing Positive Early Trade

While most global equity markets are trading lower this morning, US equities are showing a positive early trade despite geopolitical anxiety stemming from the US capturing yet another Venezuelan oil tanker. Furthermore, US equity markets are higher despite US rate cut hopes for late next month of less than 20%, talk that the Bank of Japan is poised to begin a regime of rate hikes, and generally slack global economic data. Overnight, China left interest rates unchanged at 3%, there was a minimal 0.1% gain in UK GDP, and Italian producer prices problematic with a month over month gain of 1%. Looking ahead to today’s US economic calendar, the trade will likely see a negative Chicago Fed national activity index reading for September and there will be short term Treasury bill auctions and a two year US treasury note auction.

STOCK INDEX FUTURES

As indicated already, US equities are tracking higher against a trend of lower international equity market action overnight. Technically, the March S&P managed a “gap higher” initial trade today and the market seems to retain speculative buying capacity with the most recent (delayed as of December 9th) COT spec and fund positioning report showing a “net short” of 68,435 contracts! In other words, S&P futures retain significant speculative buying capacity on top of short covering potential. Unfortunately for the bull camp, the bulls are largely without a key bullish fundamental of US interest rate cut hope with the CME Fed watch tool today projecting the odds of a January rate cut at less than 20%. Furthermore, the NASDAQ (a proxy for sentiment toward AI/chip sector/tech shares) is not leading the higher charge with the source of overall bullish sentiment today difficult to ascertain .

CURRENCY FUTURES

In our opinion, the downtrend in the dollar is set to resume in the coming weeks but significant weakness in the Japanese Yen today is providing a temporary cushion. However, the dollar is seeing cushion from entrenched respect for the US Fed’s capacity to manage the US economy into what is expected to be a “slow-down”. Clearly, the trade has little respect for expectations of three Japanese rate cuts ahead with the Japanese Yen potentially challenging 18 month lows in the weeks ahead. Clearly, the euro and Pound are winning by default as their economic differentials with the US is currently a “tossup” at best. Critical scheduled global data this week includes US durable goods tomorrow (expected to be down 1.5%), US quarterly and monthly PCE readings expect to gain 0.3%, and Japanese retail sales and Tokyo CPI on Friday (expected to tick lower).

INTEREST RATE MARKET FUTURES

The treasury markets continue to falter despite a general expectation of softening in the US jobs market. Certainly, the US economic outlook has found cushion from some positive US economic reports like retail sales but price performance in treasuries since the October high suggest US treasuries largely remain “out-of-favor” in an environment where they should be fundamentally “in favor”. In fact, expectations for October US durable goods on Tuesday call for a decline of 1.5% which means durable goods will have declined in four of the last six monthly readings. It is possible US treasuries are seeing less international buying interest particularly from Japan where rates are expected to rise. Furthermore, it is also possible that aggressive US interdiction against Venezuela, the potential for another US government shutdown (once the continuing resolution expires) and the stain of poor US government fiscal management (rampant fraud)is discouraging treasury purchases. However, with the US treasury offering fresh short term, two year, five-year and seven year supply this week and yields approaching three-month highs it is possible December bonds will find consolidation low support around 114-17 with March notes finding support relatively lower than bonds down at 111-29.

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