Asia Pacific mixed

The Dow, S&P 500 and NASDAQ ended Friday modestly firmer, while the small cap Russell 2000 fell 0.4%. But it was a decent week overall with gains across all the majors, led by the NASDAQ (up 0.9%) and the Russell (+0.8%). The Dow and the S&P added 0.5% and 0.3% respectively.

Source: TN Trader

Investor attention has focused mainly on this week’s Federal Reserve monetary policy meeting, which concludes on Wednesday. The probability of a 25-basis point cut still stands at 87%, according to the CME’s FedWatch Tool. But absent some mad decision from the central bank, it’s likely that much of the post-meeting interest will be on the FOMC’s quarterly Summary of Economic Projections (SEP).

This lays out the FOMC’s forecasts for GDP, the unemployment rate, inflation and the Fed Funds rate (via the ‘Dot Plot’) for next year and beyond. This should help give investors some idea of just how dovish, or otherwise, the US central bank is likely to be going forward.

Although the fact that Fed Chair Jerome Powell will stand down in May does confuse matters. Speculation over his likely replacement is coalescing around Kevin Hassett, currently Head of the National Economic Council, who is well known for his dovish views. President Trump will likely make an announcement before the year-end.

Going back to Wednesday’s meeting, Jerome Powell will hold a press conference half an hour after the FOMC rate decision, statement and SEP are released. This also has the potential to lead to market volatility.

Although we’re at the fag-end of the third quarter earnings season, a few interesting corporations are reporting this week, including Toll Brothers today, Oracle, and everyone’s favourite meme stock, GameStop, tomorrow and Broadcom on Thursday.

US stock index futures were a touch firmer in early trade this morning, despite a 1% gain in the VIX. But with the December VIX still trading just a touch north of 17.0, it suggests that investors are remarkably relaxed as things stand. 

US stock indices are back within easy reach of all-time highs, and it appears that the consensus expectation is for a continuation of the rally into year-end. Some may interpret this as sheer complacency on the part of investors.

European stock indices were mixed in early trade on Monday, with a slightly softer bias overall. The German DAX was outperforming, helped along by better-than-expected Industrial Production numbers. This rose 1.8% in November, outpacing the previous rise of 1.3% and well above the 0.2% increase expected. Defence stocks were also in demand. Geopolitical tensions remain a background risk, particularly around Ukraine, where US-led negotiations continue, though Moscow’s tone has grown increasingly sceptical.

Source: TN Trader

The US dollar shows signs of steadying this morning following a relentless selloff over the past fortnight. But it is still coming under some downward pressure, so it may be too early to say that a local bottom is in yet.

Despite this, the Dollar Index has found some support around 98.50, but it’s far from clear if this could turn into a significant area or not. The daily MACD has dropped back below the ‘neutral’ level, having been relatively overbought when it first retested resistance at 100.00 (spot rate) early in November.

Source: TN Trader

Meanwhile, the GBP/USD has found some mild resistance around 1.3350. Time will tell if this becomes significant, or if it is simply an area of consolidation before prices head higher.

The EUR/USD traded above 1.1670, lifted by mild risk appetite and Germany’s stronger-than-expected Industrial Production. Hawkish comments from the ECB’s Isabel Schnabel provided additional support. Yet overall, it seems likely that Forex volumes will be light until after the Fed’s two-day monetary policy meeting concludes on Wednesday evening.

Gold began the week on a firmer footing, pushing back above $4,200. Traders positioned themselves cautiously ahead of the Federal Reserve’s rate decision on Wednesday. A 25-basis-point rate cut from the Fed is priced in, but investors are hoping to get more insight into the Fed’s thinking after the release of the ‘Dot Plot’ and the subsequent press conference from Fed Chair Jerome Powell.

Consequently, it feels as if no one wants to get too far over their skis, so gold continues to consolidate. Prices have bobbed and weaved either side of $4,200 since the end of last month, reflecting a market that is waiting for clarity rather than committing to a directional move. Meanwhile, the daily MACD holds above ‘neutral’ and is yet to register a significant change in momentum or direction.

Source: TN Trader

Meanwhile, broader flows continue to shift toward silver, which has outpaced gold in recent months. On Friday, silver broke above $59 per ounce to register a new all-time intra-day high. It subsequently pulled back from its best levels. But there’s no doubt that the bulls are working hard to push prices up to $60, simply because it’s a nice round number.

Should they be successful, then the next question is if $60 proves to be significant resistance, or if silver can blow through this level just as it did at $50? The daily MACD is looking a bit extended to the upside, but this could be remedied by some consolidation around current levels.

Source: TN Trader

Front-month WTI broke above $60 per barrel on Friday to hit its highest level in over a fortnight. There was a distinct lack of clarity around peace talks to end the war between Ukraine and Russia, and this put upside pressure on prices. This outweighed negative sentiment, which followed the release of weekly US inventories, which showed a large and unexpected build in stockpiles.

Source: TN Trader

The consensus seems to be that oil prices should fall once there’s an end to hostilities between Ukraine and Russia. Sanctions on Russian output would cease, and both sides would stop pounding each other's energy infrastructure. But that argument supposes that sanctions on Russian oil exports have been successful, which is a bit of a stretch to put it mildly. At the same time, it feels as if a peace deal is still a long way off.

On Friday, Natural Gas prices rallied to their highest levels in three years. But they pulled back sharply this morning, with January Gas dropping from last week’s highs of $5.50 to just above $5.00 at the time of writing – a drop of around 9%. Mild weather forecasts drained some bullishness from a market that was looking overbought.

From the end of August to Friday’s close, gas rose 87%. So it’s no surprise that traders have looked to book profits. Despite the pullback, the move appears more corrective than structural, driven by a cooling of near-term demand projections rather than any new supply shock.

After such an extended rally, the market was vulnerable to even modest shifts in weather models, making this decline a natural pressure release rather than a change in trend.

The crypto sector was looking a bit healthier this morning. Both Bitcoin and Ether were firmer in early trade and continue to recover from their respective multi-month lows hit back on 21st November.

Since then, both have managed to put in some higher lows and higher highs, while their daily MACDs have turned up from oversold levels. It appears that sentiment towards the crypto sector has improved as equity markets show resilience going into year-end.

Volatility remains subdued, with the VIX for December trading around the mid-17 range, a level that implies markets are comfortable heading into a major week of central bank events. The steady reading shows little sign of defensive positioning despite the upcoming Fed decision, and as the US stock indices close in on all-time highs again. This reinforces the broader sense that investors feel the policy path is largely known.

US stock index futures were pointing higher as momentum built ahead of Wednesday’s Fed decision. The probability of a 25-basis point cut hovered around 90%. The US dollar sits at a crucial juncture and may be one of the most active post-decision trades.

Meanwhile, trading looks likely to be relatively subdued over Monday and Tuesday as markets await clarity. Overall, positioning suggests that sentiment is constructive heading into a defining week for risk assets.