Japan tempers recent strength

US stock indices had a mixed session yesterday. The Dow lost 0.1%, while the S&P 500 and NASDAQ eked out modest gains of 0.1% and 0.2% respectively. Small caps were once again the standout performers as the Russell 2000 added 0.8%, having gained close to 2% on Wednesday.

Source: TN Trader

Yesterday saw an unexpectedly large drop in weekly Unemployment Claims. These dropped to 191,000, way below the 221,000 expected, coming in at its lowest level in over three years. But the picture was complicated by last week’s Thanksgiving holiday. Meanwhile, job cuts have surpassed 1 million this year, according to Challenger, Gray & Christmas. The losses were driven by restructuring trends, AI-driven efficiencies and tariffs.

Yet the probability of a 25-basis point rate cut after next week’s FOMC meeting remained little changed at 87%. The Fed has emphasised that its major concern is the underlying weakness in labour markets. Yet the central bank is having to deal with an incomplete data picture due to October’s government shutdown. November Non-Farm Payrolls should have been released later today.

Now it will come later this month, after next week’s rate decision. Investors are also considering who President Trump will choose as the successor to Jerome Powell as Chair of the Federal Reserve. He is thought to favour noted dove Kevin Hassett. But there are concerns that if so, Mr Hassett may do more harm than good if he attempts to strongarm Fed members into aggressive rate cuts when there are few signs that inflation is fully under control.

The other half of the Fed’s dual mandate is ensuring price stability, or inflation. Today sees the latest Core PCE update, the Fed’s preferred inflation measure. This has been trending higher since April, and the last published update was for August, which came in at 2.9% year-on-year, way above the Fed’s 2% target. So, this is the most significant data release ahead of next week’s Fed decision.

European stock indices were modestly higher across the board, following firmness across US stock index futures. The gains were led by the Garman DAX and came ahead of a key US inflation update ahead of the US open. German Factory Orders rose 1.5%, well above the 0.3% increase expected, and up from last month’s 1.1% increase. Eurozone GDP was revised up to 0.3% quarter-on-quarter, up from 0.2%.

Source: TN Trader

The Japanese yen rallied sharply overnight as traders continued to factor in the likelihood of a rate hike later this month from the Bank of Japan. This saw the yield on the key 10-year Japanese Government Bond jump to 1.94%, its highest level since July 2007.

The USD/JPY fell back towards 154.00, its lowest level since mid-November, before it gave back most of these gains later in the session. But it's worth remembering that the USD/JPY came close to 158.00 just over two weeks ago. This yen weakness sparked speculation that Japanese policymakers would intervene to support the yen. This proved unnecessary, as the threat proved sufficient to drive the yen higher.

Source: TN Trader

Meanwhile, the Dollar Index remained on its back foot. Having failed repeatedly to crack above resistance at 100.00 on spot, the Dollar Index reversed sharply. Support seems to be building around 98.50, but the path of least resistance appears to point lower for now.

Gold pushed back above $4,200 this morning, as buyers stepped in to take advantage of yesterday’s pullback. Prices continue to consolidate around this level, with no clear indication as to whether the next big break will be up or down.

The daily MACD continues to hold above the neutral level and has certainly fallen back from the overbought levels seen at the all-time highs from back in October. Prices have recovered quite well over the last four weeks, but the rally appears to have run out of puff this week. Perhaps today’s US inflation release may catalyse a move.

Source: TN Trader

Silver lost 2.5% yesterday, although it managed to close off its lows. Silver recovered most of those losses overnight, breaking back over $58 per ounce, and once again closing in on the all-time high of $58.98 from Wednesday.

This week, support has held around $57 on a closing basis. That’s also not a million miles away from current levels. If this level of support were to break, then the next significant level comes in around $54. But going into the weekend, it’s the $57 level that is key in the short term.

Source: TN Trader

Crude oil has managed a gentle rally over the past ten days. This has seen front-month WTI push up from around $57 per barrel to just under $60 yesterday. But this rally comes within a longer downward trend, with prices pulling back from $62.50 to $57 over the preceding month.

But overall, crude prices have been falling steadily since they peaked in March 2022, soon after Russia launched its full-scale military invasion of Ukraine.

Source: TN Trader

Of course, this was a knee-jerk reaction to a horrific event, with no way of predicting how it would play out. So far, hostilities have been contained, and some would argue that a peace deal is closer than ever. Others may say that the situation has never been more parlous, as Russia’s Putin may choose to escalate rather than negotiate.

On top of this, the market fundamentals for oil have changed dramatically over the past five and a half years. Supply is plentiful, while global demand growth continues to weaken. In the very short-term, this is helping to keep front-month WTI stuck below $60. Although it’s difficult to see where prices go next.

January futures on Natural Gas remained comfortably above 5 BTU this morning. Prices have now hit highs last seen in December 2022.  Prices have put in a strong run this week, adding to the extraordinary gains made since the summer.

While not particularly overbought according to the daily MACD, gas could be due for a pullback. The big test is how traders react to any drop now. Will this prove to be a buying opportunity or the start of a deeper correction?

Bitcoin and Ether continue to recover from the multi-month lows hit this time two weeks ago. Since then, both have made several higher lows and higher highs, as they recover from seriously oversold conditions.

Could this be the start of a significant recovery across cryptos? Possibly. But much now depends on general risk sentiment. With US stock indices approaching all-time highs and as volatility continues to decline, the situation looks quite positive. But conditions can change very quickly.

The December VIX has fallen back to the mid-17 region, underscoring resilient risk appetite even as markets await key inflation data. Volatility has dropped sharply over the past fortnight, and the current level continues to reflect a market comfortable with near-term uncertainty.

The bulls remain in control ahead of next week’s Fed meeting. With markets pricing an 87%–90% chance of a rate cut and the dollar under pressure, the setup continues to favour risk assets. Today’s inflation data will set the tone going into the weekend. Crypto remains the purest read-out on risk appetite, while the VIX continues to signal calm beneath the surface.