Bets on the US discount rate is driving price action

Markets

US stocks traded modestly higher overnight as the uptick in jobless claims, a potential sign of a weakening labour market, pulled 10-year Treasury yields lower. Tech stocks returned to favour as the Federal Reserve Board discount rate continued to dominate price action in the S&P 500.

The Fed cannot provide a steer during the blackout period, so investors are hanging onto any information that could shed a guiding light on next week's FOMC meeting decision. 

On the net, the resilience of the US economy, and the dissipation of specific tail risk outcomes, even in the face of higher US yields, still sees investor buying AI stalwarts and associated shover provider. 

Diminishing tail risk around the debt ceiling and bank stress could partly explain the positive equity backdrop, and with central banks seemingly nearing the end of their hiking cycles, helped by peaking inflation, has helped drag VIX volatility precipitously lower, attracting systemic traders of all stripes. And Macro investors know the end is near( rate hike cycle), a significant benefit for the big seven Mega Cap Tech that continues to paint the tape green. 

Hence the US bellwether S&P 500 continues to perform well, albeit with narrow breadth – and the same applies even for Nasdaq's longer-duration type stocks, as optimism on the potential growth impacts of AI has likely been the biggest helper for equities in digesting higher rates. 

While FOMC participants seem divided about the policy decision at the June 13-14 meeting, it generally pays in spades to follow the signals from the leadership. They have been abundantly clear in that regard, with both Chair Powell and Vice Chair nominee Jefferson indicating a preference to pause. The main question is, therefore, whether the 339k payroll gain tipped the scales enough to change the leadership's views. A skip would make, but in our view so, would lengthy Fed pause.

Regardless of the outcome, investors are waiting for the next shoe to drop and possibly won't have to wait too long as the debt limit deal has also opened up another fresh can of worms in the form of massive volumes of short-term debt yet to hit the supply window to replenish TGA, raising concerns about broader liquidity issues. 

Oil

Headline confusion around the Iran nuclear deal has seen some whippy price action overnight. More oil updates at London Open once we figure out the headline confusion.

But where this is smoke, there is fire as the political dots are connecting with MSB reaching out immediately to Putin after an apparent successful road trip to Saudi Arabia by US Secretary of State Antony Blinken.

U.S. crude prices fell nearly 5% Thursday after a report of U.S.-Iran talks on a temporary nuclear deal allowing the Islamic Republic to export more crude.

Middle East Eye reported that the countries are nearing a stopgap agreement in which Tehran would curb uranium enrichment in exchange for Washington easing some sanctions.

Citing sources with knowledge of the talks, the British news site said Iran would be allowed to export up to 1 million barrels of oil per day, among other relief measures discussed. Oil prices fell off a cliff after the news.

Of course, if true, this is good news for the world and lowers the odds of another middle east powderkeg risk explosion. And music to the ears of central banks who have been struggling to tame oil inflation in the post-pandemic environment.