Equities are on autopilot but cannot help the dollar

Is the Fed preparing for another 50bps cut?

The markets seem to have settled down after last week’s big events with equities rallying, the US dollar underperforming and gold climbing regardless of the newsflow. Good US economic data are mostly dismissed as the labour market is now the key input to the Fed's decision-making process, while weak prints, like Tuesday’s weak consumer confidence, are welcomed as they tend to support expectations for another strong Fed cut.

As a result, the market is currently pricing in a 59% probability for another 50bps rate move on November 7, and the main US stock indices continue to record new all-time highs. Interestingly, most investment houses appear very positive about the short-term outlook, despite the US election being around the corner. 

The calendar is rather light today with only Fed member Kugler scheduled to speak about the US economic outlook, but Thursday could easily be branded as ‘Fed speakers’ day.  At least nine Fed members will be on the wires, including Chairman Powell.

Dollar remains on the back foot

Amidst these conditions, euro/dollar is flirting with the $1.1200 level and pound/dollar is trading, at the time of writing, comfortably above $1.3400. While the latter can be justified by the BoE's recent hesitation to jump on the bandwagon and announce aggressive rate cuts, the outperformance of the euro makes little sense at this stage.

Especially as the euro area is experiencing a prolonged soft patch with Germany suffering on both economic and political levels, and the Ukraine-Russia conflict hindering any long-term planning from European corporations. In this context, the joint forecasts prepared by the main German economics institutes are expected to show that Germany will contract by 0.1% in 2024, the second consecutive negative yearly performance.

Markets cautious about China’s measures

While Chinese stock indices are in green again today, market analysts are less confident about the array of measures announced on Tuesday with a yet-to-be-confirmed implementation date. The main argument is that these measures might not be enough to spur consumer demand for housing, despite the lower cost of borrowing. As such, the positive momentum could soon evaporate with disappointment potentially spreading to equity markets in China.

And this might not be China’s only burning issue as Donald Trump repeated yesterday his preference for tariffs in order to protect the US economy. He mentioned 100% tariffs on Mexican-made cars but one could easily envisage Trump using this trade practice against China’s flourishing automobile sector.

Gold and oil diverge

Gold remains in demand on the back of the dollar's continued weakness and developments in the Middle East. With Israel allegedly preparing for a ground operation in southern Lebanon, Hezbollah has urged Iran to launch another attack on Israel. Although Iran’s leadership has shown restraint, an attack is probably on the cards in order to save face, but without enraging its European allies and disrupting the main oil trade routes.