Where we are: Dow futures are up 300 points at 39,800, building on yesterday’s gains and on track for a winning week. The index is pushing toward the psychological 40,000 level, having traded in a tight range overnight following yesterday’s rally, and is significantly above its prior NY close.
What’s driving it: Easing Treasury yields are providing a tailwind to risk assets, as the 2-year yield has fallen 9bp to 4.04% and the 10-year yield is down 10bp to 4.57%. With no domestic data prints prior to the NY open, the focus remains on the bond market’s reaction to receding inflation fears and the persistent bid in the AI sector. While a US-Iran deal might limit concerns of escalation, markets are still expecting a prolonged suspension of regular energy exports through the Middle East.
- The 10-year real yield falling 5bp to 2.13% provides a tailwind for gold, indicative of receding inflation concerns and supporting risk appetite.
- CFTC data shows moderately short positioning in Dow futures, with net non-commercial contracts at -3,562, leaving room for a potential short squeeze if the rally continues.
- The VIX is down 3.43% to 17.44, signaling a decrease in market volatility and further supporting the risk-on sentiment.
NY session focus: All eyes will be on the revised UoM Consumer Sentiment release at 10:00 ET, which could provide further direction if it deviates from the forecast of 48.2. A break above 40,000 could trigger further buying, while a pullback could see support around 39,500. The current trade is long equities, short bonds. The risk trade is a surprise hawkish signal from the Fed, reigniting inflation concerns and sending Treasury yields higher. The pain trade for the Dow would be a sharp reversal driven by unexpected weakness in consumer sentiment, coupled with renewed geopolitical fears.