Critical Turning Point for Equities?

STOCK INDEX FUTURES

Global equity markets overnight were mostly higher except for the markets in Tokyo and Moscow which traded fractionally lower. Today could be a critical watershed moment for equities with a huge portion of the rally over the last two months built on ideas of a US rate cut early next year. Internally, the market is finding support from a pattern of buyout announcements, long-term hopes for an AI revolution resulting in major profits and falling energy and interest rate costs.

S&P 500: With a fresh higher high for the move and the highest trade since early August, the bull camp is obviously anticipating a soft reading from the CPI report this morning. While there are other supportive themes operating, the interest rate cut prospect is at the core of the market’s strength and in turn has the S&P trading 78 points higher in four trading sessions.

Other US Indexes: Not to be left out, the Dow futures have also forged a higher high this morning and are fully enveloped in hope for soft inflation and a very dovish flow of news from the Fed tomorrow. As indicated frequently buyout headlines continue to flow, predictions that AI will be a $140 in billion revenue technology and the prospect for a shift down in the dollar provides investors an optimistic view towards large companies in the Dow.

CURRENCY FUTURES

DOLLAR: While the currency trade has already factored in a pivot to a rate cut mentality in the US, there are likely some residual bulls thinking it is premature to rule inflation dead and very premature to think the Fed will pivot a second time in just a few months. However, the dollar this morning sits 50 points above the late November low and US scheduled data has softened recently thereby giving the bear camp an edge.

Other Currencies: While the euro could very well win by default today following a soft US CPI reading, we suspect buying interest in the euro will be metered. As overnight German wholesale prices in November fell by 0.2% that potentially puts inflation in the euro zone on a quicker downward path than in the US. Fortunately for the bull camp, the euro this morning sits 235 points below the late November high and is obviously short-term oversold.

Despite GBP jobs news this morning the pound has traded in a narrow range. While the headline claimant count declined it remained above the prior month, the number of jobs added was smaller than last month and average earnings including and excluding bonuses were down slightly thereby giving the bear camp a fundamental edge.

With the Canadian dollar just under the middle of the last three weeks trading range, recent declines in oil prices and relatively weak Canadian equity market action the bear camp should have an edge today.

INTEREST RATE MARKET FUTURES

Apparently, the treasury trade discounted generally higher global equities and instead embraced muted inflation readings from Japan and Germany. A contraction in German wholesale prices in November provides Treasury bulls with early confidence.

Expectations for this morning’s US consumer price index reading for November call for a slim gain of 0.1% which if realized would put another nail in the coffin of inflation.

With both treasury bonds and notes holding net spec and fund short positions, shorts under significant pressure since late October, soft inflation, and a breakout above 120-25 in March bonds could facilitate a very large upside extension.

With the FOMC meeting scheduled for tomorrow, today’s inflation signals are likely to be “assumed” as a major determinant of tomorrow’s Fed tone in their statement.

The December core US consumer price index (which excludes food and energy) is expected to hold steady with October’s 4.0% year-over-year rate. Earnings announcements will include Johnson Controls before the Wall Street opening.

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