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S&P Breaking Out To Upside

STOCK INDEX FUTURES

Global equity markets overnight were mixed with gains generally located in Asia and the TOPIX leading the world with a gain of 1.4%. With a higher high in the early trade this morning in the S&P, it appears the leadership role in the market has shifted from the Dow to the S&P. Therefore, the bullish bias from last week’s recovery has extended with investors at least partially embracing the prospects of a “Goldilocks” economic condition ahead. While the initial bias appears to be up, we do not detect a definitive risk on sentiment this morning with the bull case heavily built on the unending hope for a rate cut next year. Earnings announcements will include Oracle and Caseys General Stores after the Wall Street close.

S&P 500: The bias is up with the S&P breaking out to the upside today but without upside breakout action in other market measures. It should be noted that Friday’s rally and a seven-day high was posted on the highest trading volume since September 11th and more importantly the S&P futures remain net spec and fund “short”!

Other US Indexes: While the Dow futures sit just under the 2023 highs and appear to have built a shelf of solid support at 36,000, we suggest the index faces a significant junction in the coming 24 hours with the index likely to enter the critical US inflation report cycle 1800 points above the late October low! In other words, the bull camp has written a big check on ideas of falling inflation and lower rates.

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CURRENCY FUTURES

DOLLAR: The path of least resistance is up in the dollar as the markets still perceive the US economy to the growing and offering the best risk and reward in the current environment. However, it appears that the global economy is at a junction with the post Covid recovery miracle seemingly losing momentum and the markets are unsure if the cure for inflation will produce negative growth. Therefore, the trade favors the US economy because of the respect for the economic stewardship of the US Fed which will weigh in with its latest views on Wednesday. Uptrend channel support and a potential key pivot point in the dollar index today is 103. with a very critical 200 day moving average seen down at 103.03.

Other Currencies: Until critical inflation data flows tonight from Japan the path of least resistance looks to remain down in the euro with traders expecting the European economy to slow near recession in the months ahead. However, as indicated already, the coming 48 hours of trade will yield critical global inflation readings and guidance from the US Federal Reserve thereby creating the potential for a volatility event and a fresh trend setting decision.

Euro positioning in the Commitments of Traders for the week ending December 5th showed Non-Commercial & Non-Reportable traders were net long 186,234 contracts after increasing their already long position by 3,840 contracts. From a technical perspective, the path of least resistance remains down in the Pound even though the currency saw upbeat views from a UK manufacturing industry coalition.

While the Canadian dollar appears to have found value at the 73.50 level on the charts with a consolidation around that level over the prior 11 trading sessions, the Canadian is facing a showdown with the dollar tomorrow!

INTEREST RATE MARKET FUTURES

While today’s US economic reports slate is thin, the rest of the week should bring a wave of volatility as the next monthly inflation report cycle gets underway tonight with the release of Japanese producer prices which are expected to post muted readings.

Over the weekend Chinese consumer prices were reported to have declined at the fastest clip in three years, with factory gate deflation featured in the report. Estimates for US consumer prices on Tuesday morning call for a month over month gain of only 0.1% which should be seen as a sign inflation is under control.

While the CME Fed watch tool pegs the probability of a US rate cut in the March 20th meeting at only 42%, we suggest sentiment in the marketplace is at a higher psychological rate cut level.

Clearly, the focus of the treasury trade has been on a developing pattern of softening US data with the markets embracing those modestly bullish signals without much concern for the inflation side of the Fed mandate. In fact, the bull case transitioned from classic short covering to soft landing buying on November 27th and with treasury bonds into the CPI report and a 30-year bond auction tomorrow trading four points higher than on-hold pricing, the rate cut prospect is building into pricing quickly. It should also be noted that treasury bonds into last week’s high were trading roughly 14 points above the level where the markets saw the Fed pivot from high rates for longer to on-hold.

 

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Futures and options trading involve significant risk of loss and may not be suitable for everyone.  Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

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