Global stocks, bonds, gold and silver retrace collectively
On October 24th, Asian stock markets experienced a collective pullback, non-US currencies remained weak, and US stocks also saw a回调 of around 1% overnight. Gold and silver have significantly retraced after hitting historical highs. Amidst growing uncertainty, a strong US dollar has once again become the sole trading narrative, with the US Dollar Index challenging the 105 mark.
"The strong US dollar remains the market's main theme, which not only leads to high volatility in US stocks but also finally puts pressure on gold that has been setting new highs," Matt Weller, Global Head of Research at Gain Capital, told reporters. The risk-aversion sentiment has triggered a sell-off in the US Treasury market, and one of the reasons is the cooling expectations of a Fed rate cut, leading to a continuous rise in yields across all maturities and the US Dollar Index also rising to a three-month high of 104.40. If the probability of the Republican Party winning both the presidential and congressional elections (a red wave) significantly increases, it may further push up the US dollar and US Treasury yields.
US dollar bears are squeezed, and concerns about yen intervention re-emerge
US Treasury yields experienced a "bear flattening" on Wednesday, with the 10-year yield rising by 4 basis points (BP) to close at 4.25%. The 30-year yield broke through 4.50%. Since the Fed's rate cut, the 10-year yield has risen by about 60BP, corresponding to a price drop.
On the same day, the auction of $13 billion in 20-year bonds performed poorly, with the tail-end yield at 4.59%, 1.5BP higher than the previous period; German bunds continued to outperform other countries (the 10-year euro-dollar yield spread widened by another 5BP, reaching the highest level since May, with market expectations for a 50BP ECB rate cut in December increasing). This week, the Bank of Canada, as expected, lowered its interest rate by 50BP to 3.75%. However, because of this, the interest rate advantage of the US over other countries has expanded again.
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Several foreign bank traders told reporters that the recent rebound of the US dollar is mainly due to short squeezes. The strong non-farm employment data released at the beginning of October was a turning point, and CPI data also showed that US inflation began to slow down. In contrast, in September, shorting the US dollar was once the mainstream of the market as rate cuts began.
Against this backdrop, the yen fell to a three-month low, once again raising concerns about central bank intervention. Earlier on Wednesday, the yen's exchange rate against the US dollar fell to 153.19, a new low since July 31, and has depreciated by nearly 8% compared to September. Although the yen is still far from the 38-year low it touched at the beginning of July (close to 162), the recent sudden drop in the exchange rate has once again raised investors' concerns about currency intervention by the Japanese Ministry of Finance.
Japanese Finance Minister Katsutoshi Kato said that after the yen's exchange rate against the US dollar fell to a nearly three-month low, he is increasing his monitoring of exchange rate movements.
"The foreign exchange market has seen one-sided, rapid fluctuations," Kato said in Washington after attending the G20 Finance Ministers and Central Bank Governors Meeting on Wednesday. "We will closely monitor the foreign exchange market with a stronger sense of urgency, including being vigilant against speculative transactions."
US stocks retreat, tech giants are about to enter a "friction period"As of the closing bell in the early hours of October 24th Beijing time, the U.S. stock market, which had been continuously setting new highs, also began to retreat, with the S&P 500 and the NASDAQ 100 indices falling nearly 1% and 1.5%, respectively. Asian stock markets also saw a significant decline on the 24th.
It is worth mentioning that the financial reports of the "Tech Seven" will be released successively, which will dominate the market trend. Institutions predict that, as in previous years, the tech "Seven Giants"—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—will once again drive the earnings growth of the S&P 500 index in the third quarter of 2024. In particular, Nvidia and Alphabet are expected to be among the largest contributors, with Nvidia leading due to the surge in demand for AI-related chips.
Overall, it is expected that the earnings of these companies will increase by 18.1% year-on-year, while the remaining 493 companies in the S&P 500 index are expected to grow by only 0.1%, highlighting the index's heavy reliance on the "Seven Giants."
Although the earnings situation is not pessimistic, political risks are beginning to rise. Weller told reporters, "Geopolitical tensions and the possibility of a new round of trade frictions are worth paying attention to." He said that while this is unlikely to have a significant impact on earnings in the last quarter, the risks of tariffs and more regulation on semiconductor chips could put pressure on the "Seven Giants," thereby limiting the ability of tech giants to continue rapid earnings growth in the future, especially now that the election odds for Republican candidate Trump are rising. Therefore, the guidance and outlook for 2025 from the two companies will become key themes of this earnings season.
In addition, concerns about excessive AI spending by tech giants are also affecting the market. However, Franklin Templeton told reporters that there is currently no need to worry about the huge AI spending by tech giants, as this is an "arms race" for future computing power enhancement and monetization on the application side. Nvidia's largest customer, Microsoft, may expand its GPU capacity by ten times in the future, and the growth in demand is evident, and the demand from sovereign states will also surge in the future.
Since the "Seven Giants" account for nearly 40% of the NASDAQ 100 index, in the view of institutions, if the NASDAQ 100 index does indeed break through the support level, it may continue to fall to the 200-day moving average near 19,000 U.S. dollars. On the other hand, stronger-than-expected earnings may allow the index to return to its historical high above 20,750.
Profit-taking after silver and gold break historical highs
Gold, as a safe-haven asset, also experienced a pullback overnight, and silver was no exception.
Gold, after hitting a historical high of 2785 U.S. dollars during the night, gave up its gains and closed at 2715, forming a bearish reversal pattern. Silver fell 3.3% to 33.7 U.S. dollars. As of 20:20 on October 24th Beijing time, gold spot reported 2,736.32 U.S. dollars, and silver spot reported 34.07 U.S. dollars, both of which rebounded slightly.
For gold, given the recent strong momentum, traders believe that there may be profit-taking factors on Wednesday, rather than a trend reversal. Traders need to take profits to cover losses in other asset classes, especially the bond market crash. However, bulls may also continue to build positions near 2720 U.S. dollars, which is the low point touched on October 10th, with the target being the historical high of 2758.55 U.S. dollars.As early as October 18th, when the gold price broke through the $2,700 mark, there has been a recent influx of funds into gold ETFs. Goldman Sachs believes that gold prices may rise further due to the gradual decline in global interest rates and a structural increase in central bank demand. The potential for further increases in gold prices is attributed to factors such as the risk to the Federal Reserve's independence and geopolitical risks like tariffs.
Silver also sent a clear sell signal on Wednesday. This week, the price of silver approached the $35 mark, hitting a nearly 12-year high in the Asian morning session on Wednesday, but then began to retreat. Traders believe that below this level, $32.96 and $32 might attract bulls to enter, and the market tends to buy on dips.
"Since the financial crisis, every economic weakness has been prevented by the United States expanding its balance sheet and increasing QE. This has had an astonishing impact on gold, but from many perspectives, silver has fallen behind," said Weller.
After all the stimulus measures implemented due to the global financial crisis, silver soared to just below the $50 mark and has since struggled to get back above $30, compared to gold prices, which have multiplied many times over, increasing at an astonishing compound annual growth rate of 7.5% from 1970 to 2023.
However, as gold prices broke through and stabilized above $2,000 this year, silver once again attempted to stand above $30. With changes in the environment following the Federal Reserve's rate cuts, long-term U.S. Treasury yields soared, and gold entered a strong bullish trend, silver finally broke upward and quickly rose to the psychological level of $35.
Currently, institutions believe that $34 seems likely to become a low support for the upward trend, "so if we do see some profit-taking from the first test of $35 in 12 years, this is a reasonable place to wait for support to appear. Below this, $32.75 and $32 both provide some additional support structure," said Weller.
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