Where we are: The Dow futures are trading fractionally higher at 52113, a modest gain of 0.06% on the day, as we approach the New York open. This follows a mixed session where the cash index dipped 0.09% to 51667. We’re seeing a slight recovery in tech futures, which is providing some support, but the broader market tone remains cautious after yesterday’s sharp sell-off in semiconductors.
What’s driving it: The primary driver remains the US yield complex, which is showing renewed upward pressure. The US 2Y yield is up 5.0bp to 4.24% and the 10Y is similarly higher at 4.51%, with real yields also ticking up, creating a headwind for risk assets. This is occurring despite WTI crude oil pulling back sharply yesterday, suggesting the market is more focused on inflation persistence and potential Fed tightening than commodity supply shocks. The VIX, while still elevated at 17.28, has seen a slight moderation from its overnight highs, indicating some easing of immediate fear.
- US 10Y Real Yields are pushing higher, now at 2.28% (+7.0bp d/d), signaling a tightening liquidity environment and a negative signal for gold and potentially equities.
- The 2s10s spread has widened by 7.0bp to 0.34%, indicating a steeper yield curve which, while not overtly bearish, suggests a market pricing in more growth or inflation expectations.
- Net non-commercial positioning in Dow Jones futures is extremely crowded long at +2,867 contracts, an 88th percentile reading, raising the risk of a significant squeeze on any disappointment.
NY session focus: The key event this afternoon is the release of US 08:30 ET data, which will be crucial in shaping the narrative around Fed policy and inflation expectations. We’ll be watching for any significant deviations from consensus that could move yields and, by extension, the Dow. The current setup favours a trade that benefits from a yield-driven sell-off, with the crowded long positioning in Dow futures presenting a clear squeeze risk if the data disappoints. The pain trade here is a sharp, unexpected decline in US yields, which would likely trigger a significant rally in the Dow, catching shorts offside.