US earnings

Bullish factors The contraction of the Brazilian GDP in Q3 is expected to reduce the attractiveness of Brazilian assets and reinforce the need to cut the basic interest rate (SELIC), which could decrease foreign investments in the country and weaken the BRL. Bearish factors Slightly positive data for the American economy can reinforce the perception that the Federal Reserve will not raise interest rates further and contribute to the global weakening of the USD. Disclosure of data for the Chinese economy can reinforce the perception of a faster rebound, favoring currencies' performance from commodity-exporting countries like Brazil.

Bitcoin has risen 20% in the past four weeks, hitting an 18-month high, boosted by speculation that interest rates have peaked and hopes for a major Bitcoin ETF launch. Other than bargain hunting in the Russell 2000, up 1.0%, US equities were down on profit-taking. Gold took a pause and stepped from recent all-time highs. The oil price continued its downward move despite last week’s announced OPEC+ production cuts.

The Dow Jones made another all-time high of 36,265 in morning trade, despite Fed chair Powell trying and failing to talk down hopes that interest rates will be cut in the spring. Gold rose 1.6% to a new all-time high of $2,089 per ounce. Paradoxically, weaker manufacturing data, and the belief that interest rates have thus peaked is the best explanation.

The Dow Jones achieved an all-time high of 35,802 in afternoon trade, signifying the equity market’s bullish tone spurred by hoped-for interest rate cuts. Traders are placing a 40% probability of a March rate cut in the Fed Funds rate. The Fed’s favored inflation measure cooled to 3.5% annual growth, welcome but still above its 2.0% target.

Gold stood out again, rallying within a few dollars of its August 2020 all-time high of $2,075, with supporters arguing that a peak in nominal and real interest rates would underpin a continuing bull market. Oil prices also continued to recover despite no news on next year’s production quota from OPEC. The Vix fear index continues to trade near multi-year lows, reflecting growing confidence that the economy can have a soft landing in 2024, with the Fed expected to cut rates by mid-year, even though it continues to insist that will not be the case.

Gold continued to impress, up 1.4% to $2,040 (versus a one-year high of $2,085). Oil spiked 2.2% to $76.5 per barrel. Today’s consumer sentiment and holiday spending data were very strong. Two Fed governors indicated different opinions on official interest rates: Michelle Bowman thinks the Fed will have to raise rates further to bring inflation down, but Christopher Waller said he believes current rates are about right. Stocks again made little progress, with the economically sensitive Russell 2000 off 0.6%.

Bullish factors November IPCA-15 may slightly accelerate versus October, bringing some points of concern regarding inflation dynamics for the upcoming months and potentially weakening the real. Bearish factors The possibility of advancing important economic agendas for the government in the National Congress could reduce the perception of fiscal risks for Brazilian assets and strengthen the real. Data for the American economy can reinforce the perception that the Federal Reserve will not raise interest rates further and contribute to the global weakening of the USD.

The gold price is looking a little prematurely to the peak of the interest rate cycle. Seasonal December strength is historic, but do the fundamentals back it up this year? Technical considerations remain mixed but are supportive on balance. Gold and silver prices have been up 2.7% and 6.6%, respectively, since the start of last week – both are overbought in the short term.

Gold has traded in a $61 range over the past fortnight and now holds around $1,970. Silver has been more positive; after dropping towards $22, it rallied hard to more than $24 before easing. While gold’s range was 3.2% (as a percentage of the low) over the week, silver’s was 10.3%, more significant than the average 2.0-2.5 beta, and much of the silver move looks like short covering.

Bullish factors Uncertainty about the viability of budget targets in 2024 may increase risk premium requirements by investors for Brazilian assets and diminish foreign investments, weakening the real. Argentine elections can increase the perception of risks for other countries in the region and temporarily decrease managed money for Brazil, weakening the real. Bearish factors Disclosure of the minutes of the FOMC decision can reinforce the perception that American interest rates have already peaked and contributed to weakening the dollar.

Today’s 4% rebound in the oil price, reversing some part of a twenty-point fall, was the main talking point on Wall Street. As discussed below, falling oil prices have led to declining bond yields. Fears of oil over-supply are diminishing as the outlook for the world economy improves, leading to the oil price rebound. Equity markets were quiet, with the cyclical Russell 2000 again leading. The dollar was generally weaker.

The Russell 2000 was off 1.7% in morning trade as traders had second thoughts about the Fed’s appetite for interest rate cuts, which had driven a four-day rally. Bond markets stabilized after a significant yield fall, and dollar weakness persisted. The government is now funded through January 19th. Still, Wall Street is focused on today’s bigger-than-expected rise in weekly jobless claims, raising concerns about the health of the US economy. Oil was off 3.7% as the market digested yesterday's data that showed oil stocks being rebuilt and fears of a slowing world economy.

Equity markets slowed their advance on yesterday’s better CPI inflation data despite supporting data from falling PPI inflation and flat retail sales data, as bond yields rose, reversing yesterday’s strong rally. Slower retail sales mean that higher interest rates are doing their job at cooling inflation, allowing the Fed to pivot its monetary policy next year -- but it also means that the economy isn't doing well. The dollar stabilized, and oil prices saw profit-taking. Traders are rethinking the bullish view that interest rates have peaked.

Today’s consumer price data set the early tone on Wall Street, confirming traders' opinion that we are heading down the path needed for a Fed pivot next year. Bonds saw their most robust rally this year, with the benchmark 10-year yield falling fifteen basis points to 4.46%. Stocks rallied, led by a 4.4% rise in the Russell 2000 and 2.4% in the Nasdaq. The dollar sold off across the board, with the dollar index down 1.4%.

Nasdaq’s modest dip, off 0.2%, was the only highlight in morning trading. Oil prices continued last week’s rally, up 1.6%. Stocks marked time ahead of a slew of critical economic data on inflation and consumer spending and, on Friday, a possible shuttering of the US government and consequent threat to the US credit rating.

Bullish factors Uncertainty about the viability of budget targets for 2024 may increase investors’ risk premium requirements for Brazilian assets and decrease foreign investments, weakening the BRL. Bearish factors Disclosure of more moderate data for the American economy can reinforce the perception that the interest rate level in the country has already reached its peak and contribute to weakening the USDBRL. Disclosure of data on the Chinese economy can reinforce the perception of a faster rebound, favoring the performance of currencies from commodity-exporting countries like Brazil.

Nasdaq led a rebound in equity markets, up 1.7% in morning trade, demonstrating the sensitivity of leading tech stocks to the movement of long-dated bond yields. Yesterday’s marked sell-off in 30-year treasuries was partly caused by a disastrous bond auction, pushing yields up a marked twenty basis points to 4.8%. Bond yields fell back earlier today, but these sharp upticks could become more frequent. Elsewhere, oil rallied over 2% on bargain hunting after a recent sharp decline.