Tech-led rebound

Early yesterday afternoon, all the major US stock indices were little changed. They had rallied off lows hit at the end of the Asian-Pacific session, yet sentiment was still quite negative following three consecutive negative sessions for all the majors. But suddenly, they all turned sharply higher following an announcement from the US Treasury saying it would double, at least, its longer-term debt repurchases. The news comes as investors are getting increasingly nervous about global government debt levels.

Source: TN Trader

The US fiscal deficit was over $432 billion in July, its highest since March 2021 during the Covid crisis. This has seen the national debt cross $40 trillion, boosted by a mixture of Covid spending, tax cuts and war. This comes on top of concerns over AI infrastructure spending and rising inflation. Understandably, some analysts are questioning how such debt can be brought under control, given the ever-growing cost of servicing it.

The Treasury's news, which is effectively a rearrangement of Treasury maturity schedules, led to a slump in the US dollar as global bond yields, particularly at the long end, fell sharply, pulling back from multi-year highs. Other markets reacted violently as well, with sharp rallies in precious metals as traders reacted to the US dollar selloff.

The news certainly brought some relief for investors who were getting increasingly rattled by the tech-led decline across US equities. But it's worth pointing out that the snapback was perhaps not as strong as it could have been, given bigger reactions across other risk assets.

It's also worth noting that the rally soon began to peter out, and the sellers were encouraged further by the release of a hawkish set of minutes from the Federal Reserve's last FOMC meeting. The key takeaway from these was that many members remain concerned about persistent upside inflationary pressures with some significant support for future rate hikes.

Meanwhile, healthcare stocks got a boost after Moderna surged nearly 177% on positive trial results for a personalised mRNA cancer therapy developed with Merck. By mid-morning on Thursday, all the US majors were drifting lower once again. It's worth noting that S&P volatility, as measured by the VIX, suggests that investors seem remarkably unbothered by the possibility of a significant downside correction across equities.

Are they being overly complacent? After all, a subdued VIX doesn't mean that it's safe to load up on stocks, given the danger that a single negative event can send the crowd of investors rushing from one side of the boat to the other.

European stock indices were little changed on Thursday, albeit with a slight negative tilt. Like their US counterparts, all the European majors got a lift following the US Treasury announcement that it was boosting its government debt repurchases.

Source: TN Trader

But the resulting boost soon fizzled out, and buying pressure faded further after the release of a hawkish set of minutes from the Federal Reserve's last monetary policy meeting. These showed that FOMC members remain concerned about persistent upward price pressures with a few prepared to raise rates further should inflation stay elevated above the Fed's 2% target.

Meanwhile, European investors were processing an earlier warning from the European Central Bank (ECB) that Eurozone inflation near 3% remains unacceptable, especially given the risk of secondary energy shocks.

To this end, the Strait of Hormuz appears closed, and therefore controlled by Iran. Maritime tracking data shows little activity with most shipowners avoiding the chokehold. Existing oil pipelines have increased capacity where possible, thereby avoiding the Strait. But countries have also been drawing on their strategic petroleum reserves, something that has an obvious end date.

In fact, some oil analysts are saying that the US has already exhausted its reserves, as any further drawdown could damage the salt caves in which the oil is stored. Overall, it feels as if investors are getting increasingly fatigued, irritated and skittish as the long, hot summer gets closer to its conclusion. Or maybe that's just me.

The dollar took a beating yesterday afternoon following US Treasury Secretary Scott Bessent's announcement to buy back long-term government debt to ease bond yields. This is effectively a restructuring of US Treasury maturity schedules. But it does suggest that Mr Bessent and his team aim to control those longer-term interest rates on which business loans, mortgages, car financing and other borrowing costs are based.

That being the case, then the US dollar looks likely to come under significant downward pressure as rates are manipulated downwards. This news overshadowed the hawkish FOMC minutes, which would otherwise have supported the dollar. Several FOMC members were committed to raising rates should inflationary pressures fail to ease. The cash Dollar Index sliced below 99.00 yesterday, and has dropped closer to 98.00 this morning, to trade at a 13-week low.

Looking at individual pairs, the dollar was sharply lower against both the euro and sterling. But the Japanese yen underperformed in comparison. It weakened overnight after Japan's trade deficit widened on elevated energy import costs. Imports surged 27.8% year-on-year even as exports grew a robust 23.2%. Despite this, investors are confident that the Bank of Japan will raise rates at its September meeting.

Source: TN Trader

Gold surged higher yesterday afternoon following the news that the US Treasury was going to double, at least, the size of its longer-term government debt repurchases. This led to a drop in Treasury yields and a slump in the US dollar.

This triggered a surge in gold as bulls rushed in to buy. This drove the price up through $4,400, a level which has proved to be a significant area of resistance over the past ten days or so, while upside momentum was such that gold broke above $4,500 yesterday evening.

Gold failed to hold above here, however, despite the US dollar continuing its selloff this morning. While this move in gold is impressive, especially given its 10% rally off multi-month lows since the end of last month, it may be a case of too far, too quickly.

Prices may have to back up and fill in now for gold to make further gains. But even if gold were to drop back to $4,400, if it could find support there, that would be a positive sign for the bulls. Even more so should the US dollar continue to decline.

Source: TN Trader

Silver also soared on the news from the US Treasury. Yesterday it broke above $65 per ounce, an area around which prices had coalesced over the past ten days. But unlike gold, it didn't go on to break above any significant levels as $67 acted as resistance, much as it has over the past week.  Silver gained the best part of 6% yesterday, so it shouldn't be a surprise if there's some backing up and filling in to come.

The big question is if silver will be able to hold $65 as support on any selloff. As with gold, silver prices should find a tailwind should the US dollar fall further. Yet overall, yesterday's price action was encouraging for the bulls as it showed that there are plenty of buyers out there once the conditions are right.

Source: TN Trader

Crude oil prices were up sharply this morning, once again building on gains made so far this month. Front-month (October) Brent briefly broke above $94 per barrel, hitting its highest level in close to a month. Yesterday, President Trump promised an unprecedented economic campaign against Iran, saying that Washington would impose further, stricter economic measures against the country. He also warned countries against doing business with Tehran.

Iran is already under strict US sanctions on its oil exports and the US naval blockade of Iranian ports around the Strait of Hormuz remains in place. The Trump administration insists that the Strait is US-controlled and open.

Yet an analysis of shipping data continues to show commercial traffic through the strait running at a fraction of pre-war levels. This analysis would suggest that it is Iran who controls the waterway, and that Tehran is correct when it says that the Strait is closed. Looking at the oil charts, it looks as if price is breaking above resistance. The daily MACD is around neutral levels but curling up. This suggests that upside momentum is picking up.

Source: TN Trader

Bitcoin has flown higher this morning, building on the significant gains made yesterday. Finally, bitcoin has broken out of a range which had been building for around six weeks, blasting above resistance around $66,000.

This morning it traded above $72,000, a level last seen at the beginning of June. The breakout came after President Trump called on Congress to pass a key regulatory bill and the Treasury's debt-buyback announcement. The latter sparked a sharp drop in US Treasury yields and improved broader risk appetite.

Mr Trump met with crypto industry leaders at the White House. He then urged Congress to pass a fair version of the Clarity Act. This is the bill crypto proponents say would establish a broad US regulatory framework for the sector. The Commodities and Futures Trading Commission (CFTC) is due to meet crypto executives later today to discuss regulation.

*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. To the extent permitted by law, in no event shall Trade Nation (or any affiliate or employee) have any liability for any loss arising from the use of the information provided. Any person acting on the information does so entirely at their own risk. Any information which could be construed as “investment research” has not been prepared in accordance with legal requirements designed to promote the independence of investment research and, as such, is considered to be a marketing communication.