After a quiet start to the week in markets, Friday’s US session saw risk come alive. A poor US ISM manufacturing at 47.8, notable in the new orders and employment sub-components, was married with comments from Fed members Lorie Logan and Chris Waller, in turn promoting a strong rally in US Treasuries, with additional rate cuts being priced through 2024.
The result was new all-time highs in the S&P500, Dow Jones 30 and Nasdaq100, with the Russell 2000 eyeing a key breakout of its longer-term range high. New US equity highs backed new highs seen in the ASX200, Nikkei225, Euro Stoxx and DAX40. Gold also got huge attention from clients, rallying 1.9% to set at a new closing high, and we’ve seen many in our alt-crypto offering (notably Bitcoin cash) ripping.
Increased US rate cut expectations?
We’ll see if the feel-good factor lasts, but I find it interesting that equity and risky assets rallied despite seeing poor US data, where it’s easy to argue that poor data that increases economic slowdown risk, could have prompted risk aversion. So, while we can also point to Fed chatter, it seems in this case bad economic data was good for risk, with the overriding factor being increased rate cut expectations.
We’ll see if that same reaction is seen in the outcome of the US ISM services print and the various labour market readings, as these will be the key cross-asset drivers this week. Powell’s testimony to Congress will also get a look-in from traders and we know if he wants to move market pricing he can.
The ECB and BoC meeting and the China NPC meeting will get good attention but will play second fiddle to the US data.
The poor market internals in equity may be an amber warning sign to some, but market internals and breadth have offered no profitable signal for a while. Pullbacks remain shallow and there is a hunt to go hard on risk. There is plenty to navigate this week but for now, the price action shows that the bulls are very much in control. Long equity hedged with gold exposures seems the play, and looking at the charts on the higher timeframes it feels like the path of least resistance being onwards and upwards.
Good luck to all.
