Asia investors are pouring their morning coffees to another solid advance on Wall Street, helped along by a solid 20-year bond sale, a notable tech stock rally and a record high for Microsoft after CEO Satya Nadella announced that OpenAI chief Sam Altman is set to join the company to lead a new advanced AI research team.
The bulls are in charge as evidence of easing U.S. inflation supported bets that the Fed was done raising interest rates, and the next move is down.
As the week began, there were concerns that the 20-year Treasury auction scheduled for Monday might face similar sponsorship challenges that had troubled longer-duration US bonds in the preceding three months through late October. The 20-year Treasury is considered an unusual off-the-run security, and there were worries about the level of demand, especially with a $16 billion auction taking place during the week of Thanksgiving. However, the auction turned out relatively well, stopping through 0.9bps. Dealers took only 9.5%, and the indirect award was 74%, nearly three percentage points higher than the average. This success was seen as a positive development for stocks, particularly after the lacklustre 30-year auction on November 9, which had raised concerns about supply.
The favourable response to the 20-year bond auction might indicate that the issues experienced with the 30-year sale were, to some extent, a misleading representation. It's worth recalling that technical problems related to the ICBC hack were widely perceived as contributing to the seemingly poor outcome of the long bond sale.
Some professional investors have turned broadly bullish on bonds amid softer US macro data and speculation that the Fed's not only done raising rates but perhaps poised to implement so-called "insurance cuts" beginning as soon as March. For example, 61% of panellists in the November installment of BofA's Global Fund Manager survey said they expect lower long-end yields in the year ahead, the highest share on record.
On the macro front in the US, Tuesday brings October existing home sales and minutes from the November FOMC meeting. And on the latter, with softer US economic data in the driver's seat, traders would likely ignore or fade any hawkish pushback in the minutes.
Commodities and Oil
The baseline forecast anticipates that the current OPEC+ group production cuts will remain fully in place throughout 2024. Additionally, the unilateral Saudi cut of 1 million barrels per day (mb/d) is expected to be extended through the second quarter of 2024 and reversed gradually, starting in July.
The possibility of deeper cuts should not be dismissed, especially considering the decline in speculative positioning, shifts in timespreads, and higher-than-expected inventories. The market will likely respect this right-hand tail risk ahead of the OPEC+ minister's meeting.
More broadly, commodities have an unmistakably more positive vibe these days. Of course, some of that zeal can be attributed to stimulus expectations in China, but US monetary policy has been a significant deterrent for commodity markets this year. Now that the likelihood of further rate hikes is diminishing, a weaker USD may drag more investors into the sector.
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