Gold prices dropped by $3 to $3,636, and WTI crude oil fell by $1.40 to $62.27. Meanwhile, US 10-year yields decreased by 1 basis point to 4.02%. The S&P 500 increased by 28 points, or 0.9%, reaching 6,590. The Australian dollar gained ground while the US dollar lagged, due to expectations of rate cuts. The euro edged up slightly against the US dollar, highlighting a balanced outlook on growth risks by the ECB. Overall, stock markets surged, led by financial and non-tech sectors.

Jobless Claims Signal

The unexpected rise in initial jobless claims to 263,000 is a key signal for us right now. This marks the highest level since the recovery period of late 2021, indicating that the labor market is loosening. This supports the expectation that the Federal Reserve will cut rates soon. With the S&P 500 reaching a new record at 6,590, now might be a good time to buy call options on broad market indices like the SPX. The rally is expanding beyond tech stocks, so considering calls on financial sector ETFs could be a smart move. The CBOE Volatility Index (VIX) has dropped below 12, reflecting market confidence in this upward trend. The U.S. dollar is weakening overall, and this trend is likely to continue in the weeks ahead. We could use options to bet against the dollar, perhaps by buying calls on the Australian dollar, which recently broke through a key resistance level. Historically, a dovish pivot from the Fed often leads to a period of dollar weakness lasting several months.

Treasury Yields

U.S. Treasury yields are on the decline, with the 10-year yield slipping below 4%. We should consider going long on Treasury futures, as the market now expects multiple rate cuts by the end of the year. The CME FedWatch Tool shows over an 85% chance of the first cut occurring before the November meeting. This situation feels reminiscent of late 2023 when weakening labor data preceded a major stock market rally as the Fed indicated a shift in policy. Although the rise in Texas job claims was unusual, the market’s strong reaction suggests traders are looking beyond it. Thus, we should position ourselves for lower rates and a weaker dollar until new data suggests otherwise. Create your live VT Markets account and start trading now.

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