Risk mood improves as geopolitical concerns fade.

Headlines

* US to boost military aid to Israel, Hezbollah targets Israeli tanks

* Treasury yields decline as investors seek safe havens, USD stalls

* Oil settles lower as traders continue to assess risks to supplies

* Stocks supported by dovish Fed speak, gold consolidates

FX: USD fell for a fifth session in a row. This hasn’t been seen since mid-July when the summer rally kicked off. We are now testing the lower part of the long-term bull channel from the July low. Support sits at the next major Fib level (38.2% of the October 2022 decline) at 105.38. The WSJ’s Timiraos, known as the Fed’s whisperer, summed up recent Fed chatter saying higher bond yields are likely to extend the Fed rate pause. Officials are essentially signalling that a run-up in long-term rates might substitute for a further hike.

EUR is poking out of its descending channel. Less urgency for tightening is seeing dollar selling. ECB speakers cited higher bond yields sending a similar message to hikes. Hopes of China stimulus is also a small positive for the euro. The May low at 1.0635 is the next upside target for buyers after last week’s bullish hammer candle.

GBP is extending its rebound from last week's low at 1.2037. The close above the end of September high at 1.2272 means gains could push above 1.23. Firmer stocks are adding to the GBP tailwinds while UK/US yield spreads have narrowed to also help sterling.

USD/JPY was a G10 underperformer due to improved risk sentiment and despite the fall in US yields. A hawkish BoJ source reported that the bank may raise its CPI forecast to 3% from 2.5% for FY23/24.

AUD pushed north for a fifth straight session. The 50-day SMA resides at 0.6434. Consumer sentiment surveys rose while business confidence fell.  USD/CAD printed a doji candle closing near the previous day’s lows at the 21-day SMA at 1.3585. Markets reflect around a 50/50 bet of another BoC rate increase before year-end.

Stocks: US equities closed up for a third straight day, which was last seen at the end of August. The benchmark S&P 500 added 0.52% to settle at 4358. The tech-dominated Nasdaq finished 0.56% higher at 15,131. The Dow closed up 0.40% at 33,739. Recent dovish Fedspeak has helped equities along with favourable technicals. Pepsi posted strong earnings plus decent guidance for 2023 and 2024. It also stressed it had not seen any impact from weight loss drugs.

Asian futures are in the green after another positive day Stateside. APAC stocks were mostly positive on Tuesday after the long weekend and the late in the day recovery on Wall Street.

Gold printed a “doji” candle closing near Monday’s top at $1860. Short covering and fresh haven demand amid Middle East tensions are helping bugs. Falling Treasury yields are also acting as a tailwind.

Day Ahead – Geopolitical tensions tail off, Fed Minutes

It’s been a whippy week of trading already with markets looking through the Middle East conflict. The knee-jerk jump in energy prices consolidated yesterday but Brent crude remains below $90. Stagflation fears have hindered oil bulls with tighter global monetary policy starting to weigh on economic growth and global oil demand.

Markets continued to focus on Fed comments with rising bond yields and the resultant tightening of financial conditions potentially meaning the FOMC doesn’t need to hike. These new more dovish comments will mean the Fed minutes out later today may seem rather stale. More important will be the US CPI released on Thursday. Expectations are for the data to underpin a picture of slowing underlying inflation. That could mean the Fed will stay on hold, not least in light of the latest financial tightening.

Chart of the Day – Dow bumping into 200-day SMA

The stock rebound has been relatively sharp after being oversold on the daily RSI. This momentum indicator dipped below 25 a week ago so warned of a possible recovery and correction. The October low is at 32,846. Prices are now back challenging the 200-day SMA at 33,808. A prolonged move to the upside might push up to 34,281 which has been support/resistance for several months. 

(Sources: investing.com, reuters.com)