Japan’s Nikkei hits new all-time high

Last night, the Dow, S&P 500 and NASDAQ squeaked to fresh all-time closing highs, posting gains of 0.5%, 0.1% and 0.03%, respectively. The small-cap Russell 2000 closed up 0.9% to hover just under its own all-time high from last week. US stock index futures were mixed in early trade on Wednesday, albeit with a slight negative bias.

Overnight, reports came in saying that Iran had launched drones and ballistic missiles at Kuwait. These had been successfully intercepted and destroyed. The US Central Command added that the US military had carried out ‘self-defence strikes’ on Iranian targets. Oil prices were sharply higher this morning, and the US dollar rallied a touch. But US stock index futures were relatively unaffected. Despite this, all the major US indices are showing a drop-off in upside momentum.

The daily MACDs have dipped from the relatively overbought levels seen two weeks ago and are now going sideways. This is to be expected given the extraordinary run-up in US stock indices since the end of March. But the question now is whether this signals some mild consolidation before equities take another leg higher, or if this is a precursor to a significant, and some would argue, overdue pullback.

Source: TN Trader

As the earnings season winds down, the strong tailwind which came from such a solid quarter may start to fade. Meanwhile, Broadcom is set to release its quarterly results after tonight’s close. Yesterday, the stock broke above $500 for the first time, having surged 60% since the end of March. CrowdStrike and Five Below will also report after the bell.

On the data front, yesterday’s JOLTS Job Openings accelerated, coming in at their best reading this year. Today, there’s an update on ADP private payrolls, ahead of Friday’s official Non-Farm Payroll update.

European stock indices were lower across the board this morning, led by the German DAX.  Investors trimmed their exposure following reports of further hostilities between the US and Iran overnight. Iran was accused of launching drones and ballistic missiles at targets in Kuwait. But all were successfully intercepted and destroyed according to the US Central Command.

Source: TN Trader

The US military also carried out ‘self-defence strikes’ on Iranian targets. All this suggests that the Strait of Hormuz won’t be opening anytime soon, and that is something of a worry for Europe, the UK and many Asian Pacific countries. The US? Not so much, if at all.

There are also concerns as the US is threatening to impose additional tariffs of up to 12.5% on approximately 60 trading partners. The US maintains that Europe, the UK, China and Japan (amongst others) are importing goods made with forced labour and failing to take action to prevent this.  

Meanwhile, Services PMIs for the UK and across the Eurozone looked encouraging, with all coming in better-than-expected. Unfortunately, except for Spain, they all remain in contraction territory.

The US dollar continued to gain support as investors sought safety amid growing geopolitical uncertainty. The cash Dollar Index pushed back above 99.00 overnight following a fresh outbreak of hostilities between the US and Iran. It pulled back a touch after President Trump said this morning that Iran had agreed that they wouldn’t have a nuclear weapon. But investors will want to get confirmation from Tehran before cheering this potential breakthrough.

Meanwhile, USD/JPY briefly topped 160.00 to hit its highest level in over a month. Safe-haven demand for the US dollar amid the war in the Middle East is an important factor, as is the expectation that persistent inflation could lead to Federal Reserve rate hikes before the year-end.

Source: TN Trader

But it’s a yen story as well. Concerns over Japan’s economic outlook, rising energy costs and weaker services sector activity continue to weigh on the currency. In addition, Japan’s government under Prime Minister Sanae Takaichi want to unleash fiscal stimulus through tax cuts and other measures, despite entrenched government indebtedness, while the Bank of Japan wants to raise rates to choke off inflation.

Overnight, Ms Takaichi said she had affirmed with other G7 members that excessive currency moves are bad for the economy, and that FX policy is important to support it. This suggests that Japan is preparing to intervene to support the yen once more, possibly with the help of other countries.

Earlier this morning, Bank of Japan (BOJ) Governor Kazuo Ueda warned that the risks from high inflation must be put above fears of downside economic risks. This increased expectations that the BOJ will raise rates once again next week.

Gold continues to exhibit volatility and has struggled to find a footing this week. This morning, it briefly dropped under $4,440 to hit its lowest point since last Thursday. It continues to suffer from any dollar strength, as an inverse correlation between the two has become reestablished following gold’s melt-up and subsequent crash at the end of January.

Renewed hostilities last night across the Middle East have boosted investor uncertainty. Yet going into the weekend, gold approached $4,600 on hopes that the US and Iran were getting closer to agreeing on terms for peace and an end to the war, which is now in its fourth month.

Source: TN Trader

Silver was also lower this morning as traders responded to US dollar strength and rising oil prices. Silver began this week, banging up against resistance at $76 per ounce. On Monday afternoon, it suddenly dropped below $74 in the space of an hour as the bulls appeared to capitulate.

Yet it began to recover from there, and the following morning it smashed through $76 and went on to touch $77 a few hours later. But it has now done a complete round trip and is once again testing support around $74.

Source: TN Trader

As with gold, silver struggles to make any headway when the US dollar rallies. And as things stand, the dollar continues to be in demand due to the US/Iran war, and as investors now expect the Federal Reserve to raise rates this year, rather than cut them as was expected before the war broke out.

Crude oil prices continue to rally off the five-week lows hit on Friday. Front-month (August) Brent traded below $90 per barrel at the end of last week, as investors hoped for weekend progress in peace talks between the US and Iran. But it was not to be. The situation has deteriorated significantly ever since, although both sides have held off from declaring an end to the ceasefire.

Earlier today, Brent was closing in on $99 per barrel, representing a gain of 10% off Friday’s low. Everything depends on the US and Iran keeping communications open and resuming talks. But Iran has maintained that this won’t be possible while Israeli troops remain in Gaza and as Israel continues its campaign against Hezbollah in Lebanon.

Source: TN Trader

Despite this, this morning, President Trump claimed that Iran would not work towards building a nuclear weapon. The lack of a significant market reaction to this suggests that investors want confirmation from Tehran itself, rather than relying on the US President.

Earlier this morning, Bitcoin dropped below $66,000 to lows last seen at the end of March. Sentiment continues to sour as investors consider other risk assets, which have outperformed cryptos recently, making them a preferred vehicle from which to profit.

US tech stocks, particularly anything AI-related, have been an obvious alternative, while the upcoming SpaceX IPO is another clear investment target. There is some decent support around $65,000, so Bitcoin bulls will be hoping that prices can steady in this area.

But the daily MACD shows that downside momentum has accelerated following this week’s steep selloff. If there were to be a protracted and significant break below here, then that would increase the likelihood that the February low of $60,000 comes into play.

Geopolitical developments remain critical. Conflicting messages from Washington and Tehran continue to cloud the outlook for peace negotiations, while reports that Iran has mined significant portions of the Strait of Hormuz underscore the ongoing risks facing global energy markets. Despite these concerns, equity markets continue to show remarkable resilience.

Artificial intelligence remains the dominant investment theme, volatility remains subdued, and investors have shown little willingness to step away from risk assets. For now, the bullish trend remains intact, though questions about valuations, particularly within technology stocks, continue to grow louder.

Investors now turn their attention to several key events that could influence market direction over the remainder of the week. The ADP employment report will provide an early indication of labour market conditions ahead of Friday’s Nonfarm Payrolls release. Markets will also monitor the Federal Reserve’s Beige Book, US oil inventory data and results from Broadcom, a company that could once again influence sentiment toward the AI sector.

* The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.