Markets Rally as Rate Cuts Loom, Trade Tensions Ease

Wall Street chart showing record highs with gold and copper price overlays symbolizing market rotation and trade optimism.

Wall Street benchmarks made new record highs on Monday following a few key risks being taken off the table. The better-than-expected CPI print from last Friday cements this week’s widely anticipated rate cut and likely a further cut in December.

A potential US/China trade deal ahead of a key meeting between Presidents Trump and Xi this week has dialled back a key risk for markets. A risk-on tone has reasserted in markets, with the focal point now turning to Mag 7 names, with five set to report earnings this week. One by one, the crocodiles seem to be leaving the river, and the market setup favours a strong finish into the year-end. Gold continued to correct following the reversal ten days ago, as the dollar fell moderately.

The S&P500 added +1.23% to 6,875, the Dow Jones rose +0.71% with technology, and the Nasdaq Composite led with a gain of +1.86%. The Russell 2000 rose +0.3%. Earnings from Mag 7 members, including Microsoft, Apple, Alphabet, Amazon, and Meta, will all report later this week, where AI capex and productivity/efficiency deliverables will be closely parsed by investors. Expectations are skewed towards the group beating on consensus estimates.

Trade negotiations between the US and China have taken a turn for the better. Both sides have made constructive comments amidst negotiations, and ahead of a meeting this week between the leaders. The markets had, prior to the weekend, carried low expectations about an agreement being reached. A positive outcome on trade could therefore deliver an upside surprise. China/Hong Kong markets rallied strongly on Monday, with tech also leading.

President Donald Trump and China’s Xi Jinping will meet on Thursday to decide on a framework for an agreement that might see a pause on tougher US tariffs and concessions from China to continue rare-earth exports. Risks have dialled back around this event, which was a key risk flagged by leading strategists over the past several months.

Volatility has fallen sharply in two trading sessions, with the VIX lower by 2.5% to 15.8 on Monday.

After two weeks of heavy selling, hedge funds turned net buyers of US equities last week as softer inflation data fuelled bets on imminent Fed rate cuts, pushing major indexes to new highs. According to Goldman Sachs, the buying was largely driven by short covering rather than fresh long positions. I am not surprised to see hedges within the hedge fund industry being removed, given the fact that risks have broadly receded over the past week.

Bond yields continue to be well contained. The US2yr rose 3 bps to 3.5% while the 10yr and 30yr fell 1 to 3 bps to 3.99% and 4.57%. After Friday’s well-received CPI print, the Fed could call a halt to quantitative tightening and balance sheet runoff this week, keeping financial conditions loose. This might also weigh on the dollar, however, and the DXY fell 0.1% to 98.77. Still, the US dollar index has broadly consolidated above key technical support levels, which are yet to be breached.

In commodities, the correction in precious metals reasserted on Monday. Gold fell 3% to $4,007oz and continues to work off overbought conditions. Silver was lower by 3.3%. Platinum and palladium dropped a more modest 1%. Copper put in a stronger session, rising +0.8% to $5.16, and LME copper +1% to $10,962. The soft ag complex was mixed with grains strong across the spectrum. WTI crude and Brent oil were steady at $61.42 and $65.77. Iron ore rose +1.4% to $105.20.

LME Copper prices are close to breaking out to new record highs. This move in London is now being reciprocated by Comex copper, which has nearly fully recovered from the tariff-induced arbitrage unwind that caused considerable downside volatility earlier this year. We remain bullish on copper miners. More on this below.

Carpe Diem

 

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