Nasdaq 100 Surges and S&P 500 Approaches All-Time High in the Wake of FOMC

Also, 10-year T-note, silver, crude oil and Australian dollar futures

1. Nasdaq 100 E-mini futures (/NQ): +2.34% 

2. 10-year T-note futures (/ZN): -0.38% 

3. Silver futures (/SI): +2.19% 

4. Crude oil futures (/CL): +0.73% 

5. Australian dollar futures (/6A): +0.57% 

The Federal Reserve’s rate cut cycle began with a bang yesterday as a 50-basis-point (bps) rate cut was delivered. The first rate cut in more than four years arrives at a time when the U.S. economy is slowing down but not yet in recession, with subsiding price pressures and a solid (for now) labor market. That’s as close to a soft landing as one could hope for, which may be the reason there is a strong risk-on, growth-positive tilt to markets today.

While U.S. equity markets took a small step lower yesterday, the mild reaction to a “disappointing” federal Open Market Committee (FOMC) decision proved short-lived. Asian and European equity markets roared higher overnight, helping to catalyze a follow-on move into North American trading hours today. Each of the Nasdaq 100 (/NQZ4) and Russell 2000 (/RTYZ4) are up by more than 2.3%, while the S&P 500 (/ESZ4) reached its highest level since hitting an all-time high in July. Volatility is getting crushed, with the spot VIX down by more than 1.5 points to drop below 17. 

Fed Chair Jerome Powell outlined a case for markets to interpret “good news is good for stocks and bad for bonds, and bad news is bad for stocks and good for bonds.” Why? If recession fears don’t accumulate, then the prescribed path of rate cuts—effectively pacing at one 25bps per meeting over the next year—is already priced-in. Solid U.S. economic data in recent days, coupled with a rebound in energy prices, may be helping to lift inflation and growth expectations at the long-end of the curve. In fact, the best outcome for U.S. equity markets in the short-term might be weakness in the bonds. There is a 10-year TIPS auction later today.

The onset of the Fed’s easing cycle, alongside the prospect of improved global liquidity prospects against a backdrop of increasing deficits and mounting debts in the developed world, should make for a positive backdrop for metals. Indeed, gold (/GCZ4), silver (/SIZ4) and copper (/HGZ4) have each made efforts to set fresh monthly highs over the past 24 hours.  

Crude oil contracts (/CLX4) rose nearly 1% this morning because traders see a resilient U.S. economy following the Fed’s rate cut. This morning’s jobless claims data helped to affirm views on the economy as interest rates fall, which could lead to higher demand for fuel products. The rest of the year looks bullish from an inventory standpoint, with projected deficits ranging from 200k barrels per day to 500k barrels per day by the end of the year. The weak spot for the oil complex remains China, where refinery activity remains rather weak. Traders will be watching rig count data before the weekend to wrap up a busy week of events. 

Australian dollar futures (/6AZ4) rose as market sentiment improved overnight as traders digested the latest moves from the Fed and the Bank of England (BOE). Prices are facing a level of resistance carved out by swing highs from July and August around the 0.68215 level. The People’s Bank of China (PBOC) is set to announce an interest rate decision tonight, which could impact the Australian dollar, given the country’s trade reliance with China. The Fed’s decision to go with a 50bps cut could help clear a path for more stimulus by China with the yuan strengthening against the dollar.  

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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