Where we are: The Dow Jones is pointing to a robust 300-point opening gain, currently trading near the 40,150 level in early European cash. This rebound follows a volatile session on Wednesday where the index posted a fresh all-time high before suffering a sharp 500-point late-day sell-off. Futures established a solid overnight floor at 39,900 and have steadily ground higher, tracking a broader bid across US equity futures. We expect an immediate challenge of the 40,300 level as New York traders look to erase yesterday’s post-FOMC capitulation.
What’s driving it: US equity markets are quickly shaking off yesterday’s hawkish Federal Reserve hold, refocusing instead on easing yields and substantial corporate tailwinds. Although half of the FOMC now projects at least one more rate hike this year under new Chairman Kevin Warsh, the US 10-year Treasury yield has actually eased four basis points to 4.43%, while the 10-year real yield has fallen to 2.14%. This decline in real yields is providing a supportive backdrop for equities, further amplified by a massive 4.48% drop in WTI crude to $84.65 after President Trump signed the Iran peace accord. Additionally, highly supportive single-stock headlines, including Intel surging over 10% on Apple deal speculation and a key upgrade for Salesforce, are providing the index with heavy sector-specific momentum.
- The Federal Reserve’s hawkish hold, which saw half of the committee project another rate hike alongside Kevin Warsh’s launch of operational task forces.
- A major macro relief valve via the US-Iran memorandum of understanding, driving WTI crude down 4.48% and significantly lowering near-term inflation expectations.
- A constructive positioning profile, with net non-commercial accounts holding a modest net short of -2,539 contracts (56th percentile of open interest), setting the stage for a short-covering squeeze.
NY session focus: The immediate focus turns to the 08:30 ET release of the Philly Fed Manufacturing Index and weekly Unemployment Claims to see if macroeconomic data supports the soft-landing thesis. If claims print above the 225K forecast, expect yields to slide further, fueling a rapid test of yesterday’s record highs above 40,400. The trade that is working is buying the index on dips, particularly given the tailwind from falling real yields and retreating energy costs. The trade at risk is holding short positions on the premise of Fed hawkishness, as the underlying cash flows are ignoring the central bank’s dot plot. The pain trade for this market is a clean breakout above 40,350 that forces under-positioned macro funds to chase the tape higher.