Mideast Conflict And Central Bank Speculation Drive Market Volatility

Overnight futures trading has been more active than usual to start the new trading week. Coming off of strong gains on Friday which saw that Dow and S&P close at or near their highs for the year and the Russell 2000 jump nearly 3.0%. Index futures popped when futures trading resumed Sunday evening but have been drifting back downward. Currently, US index futures are trading down 0.2% to 0.5% with NASDAQ futures getting hit the hardest so far. European trading finds the Dax up 0.1% and the FTSE down 0.4%. In Asia Pacific trading the Hang Seng lost 1.1%.

Meanwhile, commodity and currency markers were very active overnight. Middle East conflict has resumed not only in Gaza but also in the Red Sea where there have been attacks on shipping. After closing at a new all-time high on Friday, Gold spiked up above $2,130/oz overnight, but has drifted back to even keel near $2.090/oz this morning. Meanwhile in other metals action, Silver is down 1.1% and Copper is down 1.8%. Bitcoin is having another big day with a 5.6% overnight gain to trade near $41,800 after peeking above $42,000 overnight. WTI popped up above $75.00/bbl overnight but has since dropped back toward $73.25/bbl, down 1.1% on the morning so far, while natural gas is down 3.2%.

There has been a growing disconnect between the hawkish rhetoric coming out of central banks, and a dovish outlook among traders seen through falling treasury yields and rising stock prices. On Friday for example, Fed Chair Powell talked about the fight against inflation not being over and leaving the door open to potential future rate hikes, but traders apparently latched on a comment that the full effect of previous rate hikes has not been felt yet as a hint that the Fed was done raising rates.

The only problem is that the comment traders took as dovish wasn’t new, central bankers around the world say that all the time as part of their trying to be balanced party line spiel. Which makes it seem like some traders were grasping at straws to keep the party going.

The Fed is now in its blackout period for the next 10 days heading into its next rate decision and member forecasts on Wednesday December 13th, and treasury yields have bounced back slightly This week, investors may look to other central banks to set the hawkish/dovish tone. The Reserve Bank of Australia, who ended a five month pause with a rate hike in November, meets tonight. The Bank of Canada, who needs to weigh last week’s weak GDP and strong employment data, meets on Wednesday.   

Between Fed anticipation and earnings season now completely over, economic news may take center stage in influencing trading sentiment. Service PMI reports from around the world are due tomorrow, with trade numbers for North America and China coming mid week. Later in the week the focus shifts to employment with US ADP payrolls due on Wednesday, plus US Nonfarm payrolls and wage inflation on Friday.

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