Nasdaq rallies on lower bond yields

Nasdaq led a rally in stocks, but the best explanation was bond buying, bringing the 10-year yield back under 5%, and profit-taking in oil, pulling back from the $90 mark. Whether this is a bullish turning point for equities or just a breather will depend on a clear direction provided by bonds and the oil price, a function of the outlook for inflation and developments in the Mid-East conflict. More inflation data is due Friday.

Bottom line: Risk-on.

TODAY’S MAJOR NEWS

Core inflation expected to decline, critical data this week

The Personal Consumption Expenditures (PCE) price index due on Friday is expected to continue recent declines, falling to 3.7% annually in October from 3.9% in September and 4.2% in August. This would be an essential development ahead of the Fed’s next interest rate decision on November 1. PCE inflation is known for capturing inflation across a wide range of consumer expenses and reflecting changes in consumer behavior. It is often called the Fed’s favorite inflation measure.

Magnificent Seven earnings reports due this week

The outperformance by tech stocks, best represented by the Nasdaq index compared to the Russell 2000 index, shown in the chart below, has become more extreme than the renowned Internet Bubble of the late 1990s. We have commented about the outsized role played by the Magnificent Seven in the recent rally. This week sees earnings releases from some key group members: Google/Alphabet and Microsoft after the close on Tuesday, Meta/Facebook on Wednesday, and Amazon on Thursday.

Nasdaq / Russell 2000 index relative

Source: Tradingview, StoneX (with thanks to John Kicklighter, StoneX Global head of content.)

Middle East war weighs on the oil price

Crude oil prices are trading more than 2% lower on fund liquidation as traders focus demand worries as long as the war remains "contained" around the Gaza Strip. The crude oil market is particularly vulnerable, as a broadening conflict could raise more significant supply risks than the current demand risks presented by the conflict. Price volatility reflects the ebb and flow of emotions in the crude oil market: currently, the money flow is negative, but the market remains quite vulnerable to headline risk. This situation could change rapidly if the Middle East sees escalation into all-out war. Energy traders worry about the possibility of supply concerns if the war escalates to disrupt production and shipments in the days ahead.

The next phase of monetary policy

Rising interest rates weigh on the longer-term economic outlook. Economists are starting to note the risk of higher debt issuance at higher rates. At some point, the Federal Reserve must be concerned that higher long-term rates will damage the economy. The market has been focused on when the Fed will pivot its interest rate policy, but the bigger question is when the Fed will again use its balance sheet tightening to keep interest rates from going too high.

We still have surplus money in the system. Still, the continual supply of debt certificates being offered will eventually require the Fed to review its policy, perhaps restarting its quantitative easing program and creating money to buy debt certificates. That increases the supply of money in the system, which typically would be expected to depreciate the dollar's value and be inflationary. We’re not there yet, but this could be the next phase of monetary policy.

TODAY’S MAJOR MARKETS

Nasdaq leads market rally

• Today, the Nasdaq led this morning’s equity market rally, up 0.8% at the time of writing, while the S&P 500 was up 0.4% and the Russell 2000 fell by 0.1%
• Foreign equity markets continued to sell off overnight, led by a 0.8% fall in the Nikkei 225 and 0.4% in the FTSE 100, with the DAX is unchanged. Chinese equities continue recent weakness, with the Shanghai Composite off 1.5% on Monday
• The VIX, Wall Street’s fear index, fell back to 20.0

Bond yields fall on bargain-hunting

• 10-year yields tracked back to 4.84%, with 2-year yields at 5.08%
• The dollar index fell 0.5% to 105.6
• Versus the dollar, Sterling and the Euro were up 0.8%, while the Yen was up 0.1%

Oil prices fall on profit-taking

• Crude oil prices fell 2.5% on profit-taking to $85.9 per barrel
• Spot gold prices fell 0.3% to 1,989 per ounce, while Silver was down 1.2% to $23.2 per ounce
• Grain and oilseed prices are mixed as traders monitor headline risk while essentially trading technical factors, lacking strong fundamental drivers currently

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com