More Gains for Equity Markets?

STOCK INDEX FUTURES

While the equity markets have been perpetually short-term overbought throughout this year, we get the sense the market is capable of more gains as developments this week are profoundly bullish with investors still fearful of missing out on “big gains.” However, this week’s low to high rally of nearly 300 S&P points increases the chance of large but temporary dip. Justification for some back and fill is also seen from the feds suggestion they will be cautious with further cuts in the potential for incoming president Trump to temporarily upset investors with harsh tariff threats. We suspect the Nvidia valuation surpassing $3.6 trillion will keep the tech/AI bull theme entrenched. Another longer-term supportive issue unlikely to wane is the likelihood that US banks will benefit from lower capital requirements. We doubt the S&P will forge an initial retracement of this week’s rally down to 5898 as the last net spec has yet to reach the highest level of this on the of the pandemic era. Obviously, the massive rally since the last COT report was gathered will result in a massive jump in the speculative long position and that could cause temporary consternation on Monday.

CURRENCY FUTURES

After the violent upside explosion in the dollar this week, we seriously doubt, the currency is poised to recover from the last 48 hours corrective slide. However, the strong leader/strong currency dictum should serve to moderate selling in the dollar. On the other hand, short-term fundamental information favors the bear camp with the US Fed cutting rates yesterday and sounding a cautious tone for another cut in December. However, the CME Fed watch tool suggests a 71% chance of a December rate cut and without signs of forward motion in the US economy there should be a fundamental glass ceiling hanging over the dollar. In conclusion, we see the bear camp with the edge this morning with the bottom of the gap from this week a target down at 103.87. The next major data point for the dollar is CPI next week which is expected to remain steady at +0.2%.

INTEREST RATE MARKET FUTURES

At least in the near-term, the aggressive washout in treasuries appears to have run its course with today’s third tier US economic data unlikely to cause volatility. In a very strange slide in prices, into a universally expected US rate cut yesterday, it is possible the treasury market is beginning to think the rate cut bias has for now run its course. In fact, yesterday the Fed Chairman indicated they will now have a careful and patient approach to upcoming policy decisions which in our mind suggests the December cut is less likely. However, the CME Fed watch tool maintain a 71% expectation of another 25 basis point rate cut on December 18^th. As usual we expect the Fed to become “data dependent” with a likely focus on the pace of the economy until next Wednesday’s CPI report. In our opinion, the change in US leadership is ultimately bearish to oil prices (increased supply views which is already evident with record US output) and that should push inflation down. In fact, early Monday, China will release their CPI and PPI readings and expectations call for noted weakness. Treasuries will keep a keen eye on deficit chatter directly ahead but given the election reaction to the Trump victory, markets do not expect swift action on the deficit.

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