US index futures traded a touch higher in early European trade. But after a big two-day rally, we might see a bit of a slowdown in the buying momentum ahead of the Federal Reserve rate decision later today, with a 25-basis point rate cut being fully priced in. Should the Fed signal a slowdown in future rate cuts in light of Trump’s inflationary policies, this could keep bond yields elevated and discourage continued buying of stocks until we see a dip. Investors will still be digesting what the Republican’s big victory will mean for fiscal policy and the US economy in 2025. So far, they have cheered the outcome of the US presidential election, but as the dust settles, we might see a bit of retracement in the days ahead, as the focus turns back to US monetary policy. In fact, financial markets had appeared confident of a Trump victory in recent weeks, given that the equity markets, the dollar and Treasury yields were all pressing higher. “Buy the rumour sell the news” comes to mind, although so far, we haven’t seen much of the selling part. Could that change, though? To be clear, even if do see a pullback of some sort, this won’t necessarily be the end of the bullish trend. While the charts continue to make higher highs and higher lows, the bulls will be happy to buy any dips they can get their hands on…until that strategy doesn’t work anymore.
What now after the big rally on post US election?Many investors may have missed the rally and will be looking to buy on the dips, as investors expect that a Trump policy agenda favoring lower taxes and less regulation may support corporate profits. The S&P 500 jumped 2.5% Wednesday, which was its best post-election day in history. Some 86 names in the S&P 500 hit new all-time highs post-election. The Nasdaq 100 hit a new record after rising 2.7% on the session. But there are a few issues that might come into focus now that the dust is settling down.Markets were caught off guard by just how quickly the results arrived—not in days, as expected, but in mere hours. With the Senate promptly called for the Republicans, the initial market response began almost immediately in early Asian trading. The Trump administration, widely regarded as pro-deregulation and keen on tax cuts, sent a clear message that’s likely to support corporate profitability.So, one of the reasons behind the big US stock market rally was that the results came out quicker than expected and traders didn’t have too much time to react: they bought into the rally than waiting for any pullback as FOMO kicked in. You can’t fault traders for doing that as the market was never going to collapse on a Trump victory that was half priced in. Indeed, Trump is seen as business-friendly and will be able to pass on his tax cuts through easily without much resistance from the democrats who have lost control of the senate. But much of the buying has likely already taken place before the election and now in the immediate aftermath.What is more, with the US election risks behind us and a surprisingly straightforward outcome, Trump’s policy agenda remains on hold until 2025—potentially even late into that year. So, there is plenty of time for the market to focus on other factors driving the markets.But staying with the Trump theme, one thing to watch out for is concerns over tariffs, which might hurt sentiment in China and Europe, and that could also weigh on sentiment on Wall Street.One other big issue that comes to mind for the markets – and Trump – to deal with is addressing the Federal debt limit. This will be reinstated on 2nd January. With rising yields, government borrowing at this pace looks unsustainable. How Trump addresses this issue with his plans to borrow even more and cut taxes remains to be seen. Could it trigger a ratings downgrade? This is a big risk that could undermine equities despite all the hype.Meanwhile, with the tech earnings mostly out of the way, delivering mostly positive-to-mixed results, there will be even less catalysts to drive the markets higher. Investors will be questioning whether the AI hype will continue to power revenue growth for tech companies, or will we see a slowdown.
Fed set to cut rates but yields could climb furtherToday’s shifts back to central banks and in particular how the Fed plans to respond. The prevailing sentiment is that disinflation is well underway, suggesting there’s no longer a need for restrictive interest rates. This will likely be the key narrative emerging from today’s FOMC meeting, where markets are already fully pricing in a 25bp rate cut. I don’t expect Chair Jay Powell to back the market’s slightly less dovish re-pricing of the Fed’s easing cycle by suggesting that prospective Republican policy will stoke inflation. Should he take that stance, it would certainly surprise markets.But is worth keeping an eye on rising bond yields, which could negatively impact sentiment, especially in growth stocks. The sentiment here is that US tax cuts may ease the pressure on the Fed to implement deep rate cuts next year. With higher Fed rate expectations, U.S. bond yields have consequently ticked upwards. If the Fed provides a hawkish message today, then this could further support yields.While markets have been preparing for these shifts for some time, it’s unlikely we’ll see any dramatic new trends right away. However, over the coming quarters, U.S. yields are likely to trend higher, especially given the anticipation that Trump’s policies will involve increased spending and rising U.S. debt. Altogether, a stronger dollar appears to be on the cards, bolstered not only by anticipated interest rate hikes but also by a dose of protectionism, which could put growth pressure on other economies around the globe.
Nasdaq 10 technical analysis(Click on image to enlarge)
The Nasdaq futures didn’t quite hit a new all-time high despite the underlying index climbing to a new unchartered territory on Wednesday. I wouldn’t read too much into this, and instead just concentrate on the key support levels and watch for potential dips to be defended near support levels shown on the chart. The most important short-term support level is now around 20680, but if this level doesn’t hold then we could see the Trump gains evaporate and dip back down to the breakout area between 20250-20385 in the coming days. The line in the sand is at 20,000-20,025 area – the most recent low. On the upside, watch the resistance trend of the rising wedge pattern to potentially offer some resistance, in the event we continue higher.More By This Author:EUR/USD Set For Big Move As Voting Starts In US Election US Stocks Drop Ahead Of Key Earnings, Data And Election GBP/USD: UK Budget, US Election, And Key Data On The Horizon
Nasdaq Hits New Highs, But What Now?
