By Michael Brown Senior Research Strategist at Pepperstone
DIGEST – Markets ,into the weekend on Friday with stocks grinding out a second straight weekly gain, and long-end Treasuries softening further. This week, all eyes are on Wednesday’s FOMC decision.
WHERE WE STAND – A fortnight or so ago, I stuck a post-it to my desk, with the levels that both spoos and the NQ would need to breach for us to register a ‘technical correction’.
On Friday, I wrote out another such note, only this time referencing when we would print a new contract high for both.
While you might say that shows I’m rather old-fashioned in writing things down (and you’d be right!), I’d argue that as a purely anecdotal gauge of how far we’ve come in such a short period of time, that’s a pretty decent one.
To put some figures on things – spoos have gained some 5% from the closing low on 20th November, while the NQ is up 6.5% over the same period. Despite that, over the same period, Nvidia is up just shy of 1%, so perhaps we can finally lay to rest all of that nonsense about it being the only stock that matters for the market, and other associated perennial concerns about narrow breadth.
As for Friday’s trade, it really wasn’t the most inspiring day for financial markets, no matter where one looked, with conditions very much giving off the vibe that most participants simply wanted to wrap things up and crack on with their weekends. Frankly, who can blame them, especially considering that ‘festive markets’ do now look to be well and truly upon us. One-month cable implieds, for instance, now sit at a meagre 5.3%, the lowest level since all the way back in February 2020.
Still, stocks eked out a modest daily gain to wrap up the week, in turn allowing the S&P to post its first back-to-back weekly gains since October.
Clearly, there is now the event risk of Wednesday’s FOMC decision to navigate, where any signs of hawkishness could trigger a short-term hit to sentiment, though I’d argue that any such dips should be viewed as buying opportunities. To my mind, the ‘path of least’ resistance clearly leads to the upside into year-end, with earnings and economic growth still robust, the policy backdrop becoming looser, and a calmer tone on trade continuing to prevail. Not forgetting, of course, the typically strong positive seasonal trend that we see in the equity space at this time of year.
As for markets elsewhere, it was the loonie that proved the biggest mover on the day, as USD/CAD plunged over 1% on the back of a much stronger than expected Canadian jobs report, which not only pointed to unemployment falling to an 18-month low 6.5% last month, but also a third straight month of job gains running north of 50k.
In fact, the CAD OIS curve now fully discounts a BoC hike by next October which, although rather punchy considering the bulk of that fall in unemployment came from a sharp decline in labour force participation, does beg the question as to whether one of the big themes for 2026 will be ‘who hikes first?’. Excluding the rather ‘special case’ of Japan, you’d wager that it’ll be either the Bank of Canada, or the Reserve Bank of Australia who win that particular race.
If that does indeed prove to be the case, one could then look to potentially trading relative policy divergences in the crosses, against those central banks where further easing, or a prolonged period on hold, could be on the cards. On that front, long AUD/NZD, AUD/CHF, and CAD/CHF as well as short EUR/CAD and EUR/AUD are a few obvious candidates.
Elsewhere, Treasuries were again softer across the curve as the week came to a close, mirroring weakness seen across DM Govvies. With that pressure having taken the benchmark 30-year Treasury yield to its highest since 25th September, at just shy of 4.80%, dip buyers are likely to be increasingly tempted, especially given the rather feeble nature of the whole ‘let’s sell on a Hassett nomination’ narrative. Still, fading this move is probably a trade that will come after the FOMC, if it does at all.
LOOK AHEAD – Unsurprisingly, Wednesday’s FOMC decision will take ‘centre stage’ this week, with the Committee set to deliver a third straight 25bp cut. Once again, the vote is likely to be a 3-way split, with Gov Miran preferring a larger 50bp move, and at least three policymakers preferring to stand pat.
Accompanying the decision will be a policy statement that, by and large, should be little changed from that issued in October, as well as an updated round of economic projections. The SEP will likely continue to pencil in a return to the 2% inflation target by the end of the forecast horizon, though focus will largely fall on the ‘dot plot’, and whether the median expectation is still for just one 25bp cut to come next year.
Elsewhere, the RBA, BoC, and SNB should all stand pat in what are likely to prove rather uninteresting decisions, with the data docket also a little barren, highlighted by just the Sept & Oct US JOLTS job openings reports, as well as October’s monthly UK GDP report.
Besides that, a fairly chunky slate of Treasury supply awaits, which will need to be closely watched amid the recent rise in long-end yields, while this week’s earnings slate includes notable reports from the likes of Oracle (ORCL) and Broadcom (AVGO).