Will it end in tears?

Either the Federal Reserve (Fed) doves are going seriously ahead of themselves, or there will be a big disappointment when the Fed will announce its policy decision tomorrow. Or... the Fed will align with the market and give investors want they want, to avoid creating further panic. The expectation of a 50bp is now assessed nearly 70% chance. The US 2-year further dived below the 3.53% level yesterday, the 10-year yield is hanging around 3.62% this morning and the US dollar index remains under a decent selling pressure, much intimidated by the rising bets for a 50bp cut from the Fed tomorrow.

The reality is that, no one knows what the Fed will do right now. I still firmly believe that a 25bp cut would be the best option due to unalarming economic figures of the moment. It’s better to start slow and accelerate if needed. But I am also increasingly confused and think that the disappointment would be so massive that the Fed may – maybe - not dare giving the market just 25bp cut. And we also start hearing that some Democrats are putting fuel to the fire asking for a 75bp cut. So, it is in this atmosphere of high confusion that the Fed will start its two-day meeting today.

Good news is, the Fed confusion doesn’t really derail the S&P500 stocks from their upper trajectory. The index closed yesterday slightly higher, a few points below its ATH level – which absolutely doesn’t show any necessity for a 50bp cut by the way. Better news is that the equal weight index is catching up with the normal-weighted, technology heavy index, as the rate cut bets fuel the rotation trade. The Dow Jones hit a fresh record yesterday – another place where we see no emergency for a 50bp cut. And small caps are trading near their post-pandemic highs. Again, here as well, there is no apparent need for a 50bp cut.

And let me tell you this. If the economic data doesn’t show enough weakness after a potential 50bp cut, the Fed may have to stop and rethink, and that would be a bad, bad thing for markets.  

In the FX and commodities, the dollar’s weakness makes the others look strong. The EURUSD spiked above the 1.11 mark yesterday and Cable trades just at the 1.32 this morning. US crude drilled through the $70pb offers and is consolidating timidly above this level this morning. The idea that the Fed could deliver a 50bp cut is appreciated among the oil bulls. But a 50bp cut could also backfire by giving the ones that call for recession reason. Consequently, the $70/72pb offers could be hard to drill.

In precious metals, gold consolidates gains near its ATH levels, benefiting both from a soft US dollar, the falling US treasury yields and a flight to safety on confusion and uncertainty about what the Fed will deliver tomorrow. Silver, on the other hand, is loving the idea of a larger rate cut from the Fed. That’s because silver has a higher proportion of industrial use than the yellow metal; it's used in electronics, solar panels, and other technologies. And when interest rates are cut, it generally signals an effort to stimulate economic growth, which boosts industrial activity. And the latter increases the demand for silver due to its widespread industrial applications. The price of an ounce jumped more than 10% since last week, and more than 15% since the beginning of August. The mint ratio – which is the ratio of gold to silver – is diving back toward the 60-80 average range, and has room to further fall with the upcoming rate cuts.

Intel jumps

Intel jumped more than 6% yesterday on news that it sealed a deal with Amazon’s AWS. According to the news, the companies will co-invest in a custom semiconductor for AI computing. Intel also confirmed that it will well separate its foundry business from the rest, to unlock its external foundry potential by giving its customers a better image of independence of its foundry unit. The news pleased investors, for once. A growing number of companies are exploring the potential of developing their own custom chips, a vision that Intel’s independent foundry services could help bring to life.