Global Equities Mostly Lower Overnight

EQUITY INDICIES:

Apparently, the corrective bounce started two weeks ago has fizzled and the bias has shifted downward. In addition to rising interest rates, the market is also undermined as result of expanding uncertainty from the approach of the US debt ceiling. Therefore, like the treasury markets, equities are likely to take direction from big-picture macroeconomic and geopolitical influences and not from internal market fundamentals like company sales figures and corporate earnings estimates. It is also likely that year end position squaring will impact equities with the prevailing tone likely to be “long profit taking” from a year of historic gains, especially if debt ceiling uncertainty spooks the markets in the waning hours of 2024. However, despite a secondary impact in the market this morning negative AI related news (from a looming federal ban of TikTok) and talk of massive 2025 AI copyright issues) should give the bear camp added confidence.

CURRENCIES:

Despite significant evidence of global slowing (particularly in Europe) the dollar has settled into a corrective drift lower. However, the Fed funds Watch-Tool pegs the probability of a January 29th rate cut at only 11.2% which should cushion the dollar against slow erosive action. The primary benefactors of dollar weakness is likely to be the euro and pound despite weak data from those areas recently and that suggests a classic technical bounce is possible instead of emerging solid fundamental uptrends in non-dollar currencies. Surprisingly, the yen remains out-of-favor despite recent positive economic news and residual inflation signals. Unfortunately for the bull camp in the yen, expectations for aggressive BOJ rate hikes are declining with hawkish threats from the Bank of Japan now largely discounted as mere hopeful thinking. We suggest traders sell a dollar index rally following Chicago purchasing managers looking for near-term downside, targeting 107.56 and then again down at 107.45. On the other hand, gains in the euro should be hard-fought and difficult to sustain with initial resistance at 1.0485.

INTEREST RATES:

While US scheduled data last week was mostly offsetting, an upside breakout in ongoing claims to the highest level since November 26th of 2021 should have favored the bull camp in US treasuries! However, the trade seems to be focused on the inability of the US Congress to contain deficit spending, with many traders suggesting growing selling pressure might be the result of bond vigilante-ism. In fact, weekend financial press stories regarding the US potentially hitting the “new” debt ceiling limit as early as January 14^th puts the ever-expanding US debt in a front and center position to start the week and to start the New Year. Over the weekend current US Treasury Secretary Janet Yellen indicated that her department may need to implement extraordinary measures prior to January 14^th but the markets could handle the situation in stride as the US has raised its debt limit 103 times since the first debt limit was breached in 1939. However, extraordinary measures by the treasury department are a temporary fix likely to prevent a shutdown from several weeks to a couple months at best.

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