Slow start to the week ahead of the Fed meeting 

Stocks are in anticipation mode

A very important week has commenced with the US equity markets digesting last week’s impressive performance. Both the S&P 500 and Nasdaq 100 indices recorded their best weekly performance since November 2023. One of the main reasons for this improved performance appears to be the shift in Fed rate cut expectations. Following last week’s data, specifically the weaker producer and import prices indices, and a WSJ report that a 50bps move is being considered, the market is currently pricing in an inflated 59% probability for a 50bps rate cut announcement on Wednesday

Oddly, the rally in US stock markets was led by technology and consumer discretionary stocks. These two cyclical sectors tend to benefit from a better economic outlook, but usually suffer on expectations of an economic slowdown. However, worries for the latter are preserved by the Chinese data continuing to disappoint as seen in Saturday’s economic releases.

Specifically, the administration’s failure to boost consumer spending is quite striking with retail sales growth remaining on a downward spiral. With the housing sector issues still unresolved, China will probably remain a strong headwind for the global economy.

US presidential election remains in the spotlight

Analysts continue to dissect the recent debate between the two presidential candidates. Despite the small advantage recorded in the polls in favour of Kamala Harris, the battle for the key states is in full swing with both candidates increasing their advertising campaigns and local rallies.

Amidst this polarizing environment, another apparent assassination attempt against Trump has been foiled. He will most likely try to take advantage of this situation to rally his followers, but it is a clear sign of concern that the Republican candidate has been targeted for a second time in less than a month.

FX market is relatively quiet, apart from then yen

Both the US dollar and the euro had a mixed performance last week as the market is clearly preparing for Wednesday’s Fed meeting. Interestingly, Tuesday's US retail sales could offer more evidence on the current economic situation, which could potentially influence the overall rhetoric on Wednesday.

In the meantime, the yen continues to benefit from the ongoing monetary policy divergence, outperforming its main counterparts with dollar/yen reaching the lowest level since July 2023. Despite the data flow remaining positive, this week’s BoJ meeting is expected to be uneventful as the market is not pricing in a strong probability for another 10bps rate hike until the December meeting.

Gold reached new highs

The increased Fed rate cut expectations and the latest aggressive talk from the Russian government about the use of nuclear weapons have pushed gold to a new all-time high. At the time of writing, it is trading north of the $2,580 area, despite the lack of buying over the past few months by China’s central bank.

On the flip side, bitcoin has again failed to reclaim the $61,000 level, prompting an aggressive move lower. The continued lack of demand for crypto ETFs is fueling the recent bearish trend in bitcoin, with last week’s US president debate acting as a strong headwind.