By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Stocks wobbled again yesterday, with the AI trade still in the spotlight ahead of Nvidia earnings tomorrow, while Treasuries and the dollar advanced modestly amid the risk-off mood. A light docket awaits today.
WHERE WE STAND – All told, it was a rather choppy and messy start to the week yesterday, largely in keeping with the vibe that we saw for most of last week in fact.
I suppose, we shouldn’t be especially surprised. Conditions, on the whole, remain largely representative of the market continuing to take a bit of a pause for breath, perhaps a little exhausted after the sizeable dip buying that we saw late on Friday. There’s probably more than a little apprehension among participants too, not only ahead of the all-important Nvidia earnings due after the close tomorrow, but also ahead of the September US labour market report due on Thursday.
Those Nvidia earnings, incidentally, once again stand as a major macro risk, as enthusiasm around the whole AI frenzy seems to ebb, with the market having shifted from an ‘all capex is good capex’ mood, to one where whether firms are actually able to monetise that expenditure has become the million (or more!) dollar question.
On that note, Amazon kicking-off a six-part bond sale didn’t help matters much yesterday, following hot on the heels of similar sales from Meta and Alphabet in recent weeks, and further fuelling concern that AI expansion is now being fuelled by debt, and not by free cash flow, in turn exacerbating jitters over the sustainability of all the spending that we currently see.
At risk of finding a narrative to suit the price action, I suppose that does help to explain the chunky equity downside seen yesterday, which was enough to prevent the S&P 500 from notching its 10th positive Monday in a row. I don’t think there’s much value in that stat to be honest, apart from it emphasising that the stock market usually, but not always, goes up, more than anything else.
Funnily enough, I remain of the view that the path of least resistance does continue to lead us higher, though it feels a bit like we might need to get past those two big event risks mentioned earlier before the market is happier to take that path. Still, with the economic backdrop resilient, the S&P about to wrap up its fourth straight quarter of double-digit earnings growth, the monetary backdrop growing looser, and a cooler tone prevailing on the trade front, the bullish narrative remains a convincing one in my mind.
That said, spoos did close beneath the 50-day moving average yesterday, for the first time since all the way back in April, probably giving the bears a bit of control in the short-term, though any dips into the 6550 region (Sep & Oct lows plus 100-day MA) would look like attractive buying opportunities. Still, zoom out! We’re up 15% YTD, and up a whopping 40% from the April lows…running around screaming about Armaggeddon being imminent, as some are doing, feels a bit over-the-top, in all honesty.
Elsewhere, it was notable that Treasuries didn’t find much by way of haven demand, with benchmark 10- and 30-year yields falling about 2bp apiece, though the natural explanation for this would be a degree of ‘crowding out’ as a result of those megacap bond sales mentioned earlier on. That doesn’t explain the lack of demand for gold, which remains capped at the $4,100/oz mark for the time being, and yesterday again demonstrated that, in the short-term at least, bullion appears to be trading in line with the broader momentum trade more than anything else.
Certainly, there remains relatively little correlation between the yellow metal and the greenback, though in truth that relationship died quite some time ago. Anyway, the buck firmed a touch against peers yesterday, though most notably against the JPY, with USD/JPY trading comfortably north of the 155 figure.
That move, it must be said, was largely driven by substantial JPY softness as opposed to anything else, with EUR/JPY also trading to record highs north of 180 – one for the darts fans there. Deteriorating Sino-Japanese relations appeared to be the catalyst for the latest bout of selling, but momentum is clearly with JPY bears for the time being, which will likely worry an MoF already highly concerned about currency weakness, and clearly raises the possibility of another round of ‘yentervention’ potentially being on the horizon.
Finally, a brief word on rate expectations. The USD OIS curve is, as near as makes no difference, now discounting just a 40% chance that the FOMC deliver another 25bp cut at the December meeting. To me, that looks like a fade all day long.
You are, essentially, guaranteed at least seven votes in favour of a cut at the final confab of the year (6x Board members, ex Gov. Miran, plus NY Fed Pres. Williams), with Miran near-certain to dissent for a larger rate cut. It’s tough to imagine any data between now and then, besides a ridiculously hot labour market report that’s about as unlikely as pigs flying, deterring that contingent from plumping for another 25bp reduction next month. Hence, what the voting regional presidents, whose remarks have erred hawkish in recent weeks, have to say is unlikely to materially alter the outcome of the meeting itself. The recent hawkish repricing of rate expectations, hence, looks like a fade all day long to me.
LOOK AHEAD – Not much for participants to get their teeth into on the docket today, in what looks a bit like the ‘calm before the storm’.
All we have, then, is a smattering of central bank speakers, the delayed August US factory orders figures, and perhaps most importantly Home Depot kicking off US retail earnings which, in the absence of official data, will be an important barometer of consumer health as we move into the all-important holiday season.