🌟 Market Report.
📉 Over the last few weeks we have warned in our reports that the key now was whether the Fed cut would be 25bp or 50bp. Today, the day of the decision, Bloomberg publishes an article warning of the impact of a weaker than expected cut.
💼 Traders have taken record-sized positions in Fed funds futures betting heavily on a 50bps cut, leaving them at risk of losses if the Fed only cuts 25bps. Recent media reports and comments have shifted expectations toward a larger cut, with markets now pricing over 50% odds of 50bps. Treasury yields have fallen sharply on expectations of aggressive easing, leaving markets vulnerable to a sell-off on a smaller-than-expected cut. Broader sentiment remains bullish in surveys but long positions were reduced ahead of this week’s meeting.
🇬🇧 In the UK, inflation data has come out carefully accurate to expectations, just enough to avoid noise and volatility ahead of the Bank of England’s interest rate decision tomorrow. UK inflation held steady at 2.2% in August, matching forecasts but below the BOE’s latest projection of 2.4%. However, Services inflation, a key indicator for domestic price pressures, accelerated to 5.6% from 5.2% driven by a large jump in air fares, reinforcing views of a cautious BOE approach to further policy adjustments. Rate futures still point to two quarter-point cuts by end-2024, suggesting markets expect a gradual easing path.
🛢️ Crude oil temporarily surpassed 74 dollars a barrel Brent yesterday, after the Israeli attack. However, as the hours passed, it has returned to trade below this price barrier, remaining unusually cheap.
🤝 BlackRock, Microsoft and UAE’s MGX are launching a partnership to invest up to $100 billion in AI infrastructure like data centers and renewable energy projects. They will seek $30 billion of private equity capital over time to fund the investments, leveraging the funds raised. Most investments will be in the US but some will also go to US partner countries, focused on building out computing and energy capacity for AI. The partnership also involves Nvidia and aims to dramatically expand computing infrastructure availability for AI applications.
📊 Market View:
📈 US futures remain broadly in the areas we saw yesterday, awaiting the Fed’s rate cut decision. The S&P 500 is trading tentatively above 5700 points. The Nasdaq 100 is above 19,510 points. The US 2 year bond has reached almost 3.50% yield, discounting what the market believes will be a 50 basis point cut. As we have already indicated, if the cut is lower, it could lead to a sell-off in bonds and a rally in premiums, as well as a contraction in equities.
💱 The dollar remains weak, with the DXY in the 100 point area. EUR/USD remains higher at 1.1125.
🇪🇺 In Europe, the DAX 40 managed to break above 18,800 yesterday, but it was short-lived, having fallen back towards the 18,730 level. The Eurostoxx 50 also remains weak from the levels reached at the end of August, trading in the 4850 point area.
🏆 Meanwhile, gold remains strong above $2600 per ounce, taking advantage of the weaker dollar. Crude oil, as mentioned above, rebounded slightly yesterday on the back of the Israeli attacks, but has returned to the weak areas we have been discussing in recent weeks. Finally, bitcoin is very close to 60,000 and seems to be trading between ranges since the spring of this year.
🌐 Geopolitics:
💥 Yesterday, a synchronised Israeli attack on pagers used by Hezbollah personnel resulted in several deaths and thousands of injuries. It was initially reported as a hacking of communications systems that caused the batteries of the devices to explode. Hours later, the New York Times reported that the pagers, which Hezbollah had ordered from Taiwan, were tampered with before arriving in Lebanon. Explosive material, weighing between one and two ounces, was implanted next to each pager’s battery. A switch was also incorporated that could be activated remotely to detonate the explosives.
🇺🇸 Trump has assured that he will lift the limitations established under the SALT (State And Local Taxes) law on federal and local tax deductions, capped at a maximum of $10,000 since 2017, under his mandate. Repealing the cap would add $1.2 trillion to the cost of extending that tax law over 10 years according to estimates. This measure would reduce the tax burden on New York residents, which could win voters in the Democratic state.
🔧 Chinese chip equipment and semiconductor stocks jumped on news of a claimed breakthrough in homegrown lithography machine development. The Ministry of Industry said state entities should use indigenous equipment able to resolve 65nm or smaller features. This marks significant progress from the previous best domestic machine’s 90nm capability, reducing China’s reliance on restricted US exports. Companies like SMEE are racing to narrow the gap with leaders like ASML, though catching up remains a long-term goal. Gains in related stocks reflect optimism China can work around US sanctions by advancing its indigenous semiconductor manufacturing capabilities over time.
