Sentiment Shifts from Pessimisstic to Positive on Rates Outlook, Tech Sector

KCM Trade | Market Commentary | Tim Waterer | Sentiment Shifts from Pessimistic to Positive on Rates Outlook, Tech Sector 

Over the past week, markets have done a U-turn on both the chances of a December rate cut by the Fed and the profitability prospects for the tech sector. Dovish sentiment expressed by Fed members Williams, Waller, and Miren since late last week, combined with tame US retail sales and PPI data, has shifted the chances of a rate cut next month from down near 40% back above 80%. 

At the same time, hype over Google’s Gemini 3 AI model and Meta’s investment plans have led to tech-sector sentiment reversing course. The news around Google has sent parent company Alphabet higher, keeping AI profitability worries at bay (worries have affected global stock indices the most in November). 

Thus, the market mood has gone from pessimistic to positive with respect to the outlook for interest rates and the tech sector. Nevertheless, sentiment can shift significantly, and at the drop of a hat, so more fluctuations on these two fronts are expected. Particularly in the lead-up to the FOMC meeting on 9-10 December. 

In FX, the softer batch of US macro data, retail sales, and core PPI, and increasing expectations of a December interest rate cut have dulled the Dollar's performance. The Dollar Index, DXY, has slipped below the 100 level, partly because the USDJPY rate retreated from its recent highs. The USDJPY price has moved down from the 157 handle to the 156 handle; investors are monitoring whether any further rounds of yen weakness may prompt Japanese authorities to stabilize the yen.

The decline in the value of the dollar and growing anticipation of a rate drop by the Fed in December have somewhat eased the situation for the price of gold. The latter looks more surefooted once again in reaction to the evolving yield outlook. Spot gold currently trades around $4132 ( mid-morning Asian trading hours on Wednesday) ahead of support at $4116, $4087, and $4042. Resistance awaits at $4165, $4290, and further out at $4237. To conclude, the reshaped interest rate is promising for gold, but the uptick in risk appetite and potential Russia-Ukraine peace deal could decrease the safe-haven demand. 

Oil is another commodity that may be affected significantly by the outcome of the Russia-Ukraine peace deal discussions. Though oil has seen some support from hopes of a possible December interest rate cut from the Fed, counterbalancing that might be the prospect of Russian oil re-entering the global market. US crude has support at $57.10 and resistance at $58.93. But where oil prices head in the near future really depends on whether a peace deal between Russia and Ukraine is reached. Oil prices are likely to increase if the talks fail to lead to any resolution.

Later in the week, US Thanksgiving is likely to drain liquidity from the market in the back half of the week. Lower liquidity might contribute to higher volatility levels. On the data front, the Tokyo Core CPI reading due on Friday could impact expectations for a potential BOJ rate hike next month should we see a print north of the 2.7% rate expected.

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