US stocks bounced back as they nearly recovered from the declines observed between Thursday and Friday after a weaker-than-expected US jobs report. The NASDAQ index closed above its 100-hour moving average at 20987.91, though it fell short of its Thursday closing level of 21122.45.
The S&P index ended Thursday at 6339.39 and closed today at 6329.94, slightly under its 100-hour moving average. Future market movements in both the S&P and NASDAQ indices are poised to be crucial.
Foreign Exchange Market Overview
In the foreign exchange market, major indices stayed within 0.20% of Friday’s levels, except USDCHF, which rose by 0.50%. Yields in the US debt market dropped as anticipations grow for rate cuts in September and later in the year. The 2-year yield fell to 3.677%, while the 10-year yield declined to 4.196%.
Crude oil decreased by $1.11 to $66.22, and gold prices climbed $11.42 to $3374.09, responding to the lower yields. Silver increased by $0.40 to $37.41, and Bitcoin surged $700 to $114,928.
Factory orders met expectations with a -4.8% result, coming after an 8.3% rise the previous month. San Francisco Fed President Mary Daly indicated future rate decisions will be data-dependent, with possible rate cuts considered.
The stock market is at a turning point, with both the NASDAQ and S&P indices testing key technical levels. With the market trying to recover from last week’s weak jobs report, we see this as a sign of major uncertainty. Traders should consider using options to bet on a spike in volatility rather than picking a firm direction.
Historically, periods right before the Federal Reserve begins cutting interest rates, like the lead-up to the 2019 cuts, have seen a rise in the VIX volatility index. The current tension in the indices suggests a similar pattern could be forming now. A decisive break of these technical levels in the coming days could trigger a significant move.
The clearest signal is in the debt market, where yields are consistently falling as investors anticipate Fed rate cuts. We think this trend will continue in the coming weeks. This suggests traders could take long positions in Treasury futures to profit from further declines in interest rates.
Expectations for Future Market Trends
To support this view, data from the CME Group’s rate-watching tools shows the market is now pricing in an 85% probability of a 25 basis point cut by the September meeting. San Francisco Fed President Daly’s comments about the softening labor market only reinforce these expectations. These factors create a strong case for betting on lower yields ahead.
Lower yields and economic uncertainty are creating a positive environment for gold. We see its recent price increase as the start of a bigger move, similar to what happened in the past when the Fed has eased policy. Buying call options on gold could be a good way to capitalize on this expected upward trend.
Looking back, gold performed very well during the last major rate-cutting cycle that began in 2019, rallying for over a year. At the same time, we expect crude oil to remain weak due to signs of a slowing economy, such as the drop in factory orders. Recent government data from late July also showed a surprise build in crude inventories, adding to the downward pressure on prices.
In foreign exchange, the biggest risk we see is for the Euro, due to the renewed threat of significant US tariffs on EU goods. This could put serious pressure on the EURUSD exchange rate in the near term. Using put options to protect against or profit from a drop in the Euro seems like a prudent strategy.
We have seen this play out before, specifically during the 2018-2019 trade disputes with China, which caused major swings in the yuan. The current situation with the European Union could easily follow a similar script, creating sustained downward pressure on the euro. The upcoming China services PMI data will also be critical for setting the tone for global risk and currency markets.
