The barrel of American crude finally cleared the $74/75pb resistance range on the mounting geopolitical tensions in the Red Sea and traded at $76pb on Tuesday. Yet the bullish market reaction looks relatively week given the amplitude of the issues in the region. The rally will likely continue at a gentle speed. The next natural target for oil bulls stands at 200-DMA, near $78pb, but the price should meet solid resistance at this level due to weak momentum.
Other than oil, yesterday was a slow day where the dovish Fed expectations continued to remain in the driver seat and drive the US stock and bond markets higher… while many other markets were peacefully sleeping. Buyers rushed into the US Treasury’s bond auctions yesterday to close in some good deals before the year ends on expectations that the Federal Reserve (Fed) will start chopping the rates by spring. According to Bloomberg, Treasury’s 52-week bill auction saw a record demand from indirect bidders – a group that includes foreign central banks – and the 6-month bill saw 71.6% demand, the 3rd biggest in history. This means that investors expect the yields to come significantly lower in the next 6-12 months. Consequently, the US 2-year yield slipped below the 4.30% mark, the US 10-year yield steadied below the 3.90% level.
The US dollar remains under a decent selling pressure, gold extends gains on the back of softening US yields – that decrease the opportunity cost of holding the non-interest-bearing gold, the EURUSD continues to push higher above the 1.10 level on the back of hawkish European Central Bank (ECB) commentaries, yet the rally in the Japanese yen starts giving signs of exhaustion into the 140 mark in the short run. A stronger yen will help the Bank of Japan (BoJ) rein in on inflation and decrease the need of normalizing. In the longer run, even if the BoJ doesn’t act, a dovish shift from the Fed should ensure a fall in the USDJPY towards 130/132.
The interesting thing is, we see the negative correlation between the Japanese Nikkei and the yen – wane. The latest appreciation in the Japanese yen didn’t bother stock buyers. The Nikkei continued to find buyers even with a stronger Japanese yen, meaning that either the stock investors don’t want to price in a potential easing from the BoJ – and maybe THEY are right, or the Fed dovishness is a nice boost to global stock markets and Japanese stocks benefit from the dovish Fed winds. In all cases, Japanese stocks remain on track for more gains.
In America, the S&P500 buyers will certainly not back down before sending the index to a fresh high this week, or the next. The index was trading just 0.5% below its ATH yesterday, so it would clearly be a shame if we finished this year without an S&P500 record, no?
But yes, the market optimism is overstretched, the Fed’s rate cut expectations are unfunded – in that, yes, the Fed will probably cut rates but not at the speed that’s been currently priced in – the oversold market conditions do hint that a downside correction would be healthy. Once the Santa high fades, the hangover will hit.
