Asian-Pacific indices pull back

US stock index futures were down sharply on Friday morning, pulling back after another record-setting session across Wall Street. At yesterday’s close, the S&P 500 and Nasdaq Composite ended up 0.8% and 0.9% respectively, and at fresh record highs.

Source: TN Trader

The Russell 2000 added 0.7%, while the Dow Jones Industrial Average also jumped 0.8% to close above 50,000 for the first time in over three months. But there was a distinct ‘risk-off’ tone across financial markets on Friday morning. The selloff was generalised, although semiconductor stocks were down more than others, with traders looking to capitalise on the sector’s outsized gains from the lows hit in late March.

Today’s weaker start comes after Cerebras stock jumped 6% in after-hours trading following the AI chipmaker’s public markets debut. There’s also plenty of buzz around SpaceX, which could release its IPO prospectus as early as next week. In addition, NVIDIA, the world's largest corporation by market capitalisation and leading chip designer, reports on Wednesday.

So, there’s plenty to consider in the tech sector, even as investors look to trim some of their exposure. Some have turned cautious towards equity markets, citing the lack of breadth in the rally over the last six weeks. Most of the gains have come from a small number of mega-cap technology companies, suggesting some fragility as the tech-heavy indices continue to hit all-time highs.

Looking back at the rally from the October 2022 lows, tech has been at the vanguard and posted outsized percentage gains. Yet all pullbacks have been countered in their severity by a rotation out of growth and into value.

In other words, investors have kept their faith in US equities, by simply putting their profits from the growthy sectors into overlooked corners of the market offering ‘better’ value. If that rotation stops, then investors should expect a deeper and more prolonged correction than has been experienced so far over the last three and a half years.

European stock indices fell sharply on Friday as investors reacted to a pullback in Asian Pacific equities and a morning selloff across US stock index futures. There was also the little matter of the continued political instability in the United Kingdom. Prime Minister Starmer may have felt that he had scared off his rivals after Health Minister Wes Streeting failed to formally launch a challenge.

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But then things fell apart after Mr Streeting resigned his ministerial post and then called for a longer campaign so that Andy Burnham could have an opportunity to win a seat in Parliament and thereby qualify as a leadership candidate. Mr Burnham, currently the Mayor of Manchester, may gain a route back into parliament following the resignation of Labour MP Josh Simons.

Alternatively, he may face humiliation if Reform manages to block his passage, so to speak. UK Gilt yields remain elevated, while sterling has dropped sharply this week. Investors were expressing their concern over the ongoing political uncertainty, particularly as a more left-leaning Labour leadership (Burnham, and anything connected to Angela Rayner) could result in higher borrowing and public spending.

The US dollar was once again stronger across the board this morning, adding to gains made throughout this week. There are many factors contributing to the dollar’s current popularity, including a ‘flight to quality’ given that there is no evidence that the war between the US and Iran is likely to end anytime soon.

In addition, this week saw the release of hotter-than-expected US inflation. This showed up in numbers for both consumer prices and producer (wholesale) prices.

US Treasury yields were up sharply as well, and this all reinforces expectations that the Federal Reserve, under the new chairmanship of Kevin Warsh, will be unable to loosen monetary policy further, something which is bound to annoy President Trump.

The cash Dollar Index pushed above 99.00 to hit its highest level since early April. It is also on course to post its best weekly performance in around two months. Other currencies are struggling for their own domestic reasons. Against the dollar, sterling fell over 2% from Monday’s high to the overnight lows due to the political uncertainty cited earlier.

Meanwhile, the USD/JPY pair climbed above 158.60, taking the yen back down to levels last seen after the Japanese authorities intervened to strengthen the currency. This will be particularly bad news for Japan’s policymakers, who may be forced to intervene again, at great cost, should the USD/JPY get back up towards 160.00.

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Again, as with the UK, overall dollar strength is combining with political ineptitude to undermine domestic currency strength. In this case, there’s a government determined to reduce taxes and boost fiscal stimulus. Yet faced with a central bank which is desperate to tighten monetary policy to curb inflation and support the yen.

Gold prices slumped overnight to extend their weekly decline into a fourth consecutive session on Friday. The selloff came as the US dollar rallied and as rising Treasury yields continued to weigh on investor sentiment. The precious metal has dropped around 5% since the highs hit on Tuesday, going from a three-week high above $4,770 to below $4,550 this morning.

Gold is now approaching a mild area of support around $4,500. If it fails to hold here, breaking down in a significant and protracted move, then the next major support comes in around $4,400.

Source: TN Trader

Gold is coming under pressure as there appears to be little chance that the Federal Reserve will be able to cut rates this year. In fact, inflation has risen to such an extent that the probability of a 25-basis point rate hike is now over 37%.

Silver dropped sharply for a second straight session on Friday. Early evening on Wednesday, silver hit a two-month high as it broke above $89 per ounce. It looked as if silver was poised to make a run for $90. But profit-taking came in as investors couldn’t ignore the strength of the US dollar, which rallied on hotter-than-expected US inflation data, and a lack of progress in bringing an end to the US war with Iran.

Silver dropped below $77 this morning, representing a decline of 14% from Wednesday’s high. It needs a quick rebound to take it back above $80 to reinvigorate bullish sentiment. But in the current environment, that would require a pullback in the US dollar.

Source: TN Trader

Unfortunately, traders are actively concerned about inflation and higher Treasury yields, and that is a disincentive for silver bulls. But should there be a sudden improvement in US/Iran relations, or some good news following President Trump’s trip to China, then anything is possible.

Oil prices spiked higher overnight in a move which saw front-month (July) Brent jump around 3% to close in on $110 per barrel. The rally came as Donald Trump claimed China had agreed to purchase oil from the US following discussions with Xi Jinping in Beijing. Oil then gave back most of these gains, and it’s fair to say that the markets remain jittery and volatile.

Source: TN Trader

Investors are probably disappointed that there has been very little news following yesterday’s talks between Presidents Trump and Xi Jinping. There were certainly plenty of topics to cover, including, but not limited to, trade, tariffs, AI, rare earths, energy, the US/Iran war and Taiwan.

So far, the only comment of any significance came from Xi Jinping when he told the Trump administration to butt out of Taiwan or risk the consequences. US Treasury Secretary Scott Bessent has said that China would work behind the scenes to help reopen the Strait of Hormuz. Perhaps more details will emerge over the weekend.

Meanwhile, OPEC and the International Energy Agency continue to warn about tighter global supply conditions. Increased geopolitical tensions and the ongoing closure of the Strait of Hormuz, which remains controlled by Iran, have raised concerns that oil prices could remain elevated for an extended period.

Just under a fortnight ago, Bitcoin broke back above $80,000 for the first time since the end of January. Since then, it has consolidated around this key level, although the first half of this week brought some profit-taking. This suggested that Bitcoin was struggling to hold $80,000 as support. But prices pushed higher throughout Thursday afternoon after the CLARITY Act cleared the Senate Banking Committee in a 15-9 vote.

This is a significant milestone for US cryptocurrency regulation, which, as the name suggests, brings greater clarity across the sector. Bitcoin briefly nudged above $82,000, although it has pulled back a touch, given this morning’s general ‘risk-off’ move in US stock index futures, and the bounce in the dollar.

The legislation still faces several procedural hurdles, including a full Senate vote requiring bipartisan support before heading to House reconciliation and eventual presidential approval. But if it does pass, Bitcoin and Ethereum will be regulated as digital commodities under the oversight of the Commodity Futures Trading Commission. This could help boost confidence, and clearer regulation may encourage greater institutional participation across the crypto sector.

Markets are ending the week in a cautious mood as investors weigh the risks of rising inflation, elevated oil prices and ongoing geopolitical uncertainty.

The VIX volatility index rose around 4% to near 19 as traders reduced risk exposure heading into the weekend. Despite this, the VIX is nowhere near levels which would imply any investor stress, although things can change quickly.

The Trump-Xi summit produced some signs of improving relations between the United States and China. But Chinese warnings concerning the US attitude to Taiwan, along with unresolved Middle East tensions, continue to limit broader optimism. The US Dollar remains firm, supported by higher Treasury yields and growing expectations that the Federal Reserve could keep rates elevated for longer or potentially raise them again later this year.

High oil prices continue posing risks for global inflation and economic growth. Investors will also continue monitoring developments surrounding the Strait of Hormuz, US-Iran negotiations and any additional headlines emerging from China-US relations.