Russell 2000: Uncertain Monetary Policy, Geopolitical Turmoil, Earnings and Another CPI Report. What Could Go Wrong?

Equity futures are inching higher this morning, while U.S. Treasury Yields are falling as traders and investors expect more rate hikes next year

This Morning’s Five Futures in Focus:

1. Russell 2000 e-mini futures (/RTY): +0.07%
2. 5-year T-note futures (/ZF): -0.27%
3. Silver futures (/SI): -0.29%
4. Crude oil futures (/CL): -0.38%
5. Australian dollar futures (/6A): -0.22%

Markets are seeing risk appetite return on Tuesday as traders digest news out of China while continuing to assess the conflict between Israel and Hamas in the Middle East.

Despite the likelihood for the conflict spiraling further out of control, the focus, for now, is on China, where Beijing is ready to implement additional stimulus actions to bolster its economy. However, with earnings season about to kick off and an event-heavy economic calendar, the likelihood of volatility expansion in the market will remain elevated. As always, traders should remain nimble and ready to move alongside the whims of the market.

Equity futures are inching higher this morning after reports crossed the wires suggesting that China is mulling several stimulus measures to boost its economy, one being an increase to its budget deficit. E-mini Russell 2000 futures were trading about one point higher at the opening bell. At the same time, recent commentary from Federal Reserve speakers is causing rate traders to second guess the possibility of more rate hikes next year. The upcoming U.S. consumer price index (CPI) figure will be key to the direction of equities.

The haven demand seen on Monday in markets is fading, which is causing bond traders to sell Treasuries this morning. The selling comes despite the Federal Reserve’s vice chair pushing back on the prospect of needing more hikes. Traders may see newly announced stimulus measures out of China as a potential driver of further economic strength, which could promote the need for more tightening. Several Fed members are scheduled to speak today, including Mary Daly and Neel Kashkari.

Silver prices (/SIZ3) are trading lower after yesterday’s gains, and traders are likely to take some profits off the table. Meanwhile, the geopolitical risk premium that drove that move remains supportive of gold (/GCV3), and with the potential for the conflict in the Middle East to spiral further, traders may return a bid to silver as well. That may be especially true if equity markets come under pressure again, which could be triggered by poor earnings numbers in the coming weeks. Overall, the bull case for precious metals has strengthened.

Crude oil (/CLX3) prices are little changed in morning trading after the commodity jumped 4.3% Monday on the Israel-Hamas conflict, the largest daily percentage gain since April. Tomorrow, the American Petroleum Institute will report weekly inventory figures. Traders are attempting to gauge if last week’s inventory build in gasoline stocks was due to a demand collapse instead of seasonal weakness that probably was exacerbated by destocking among gas station owners. In the meantime, energy markets remain at risk from an escalating conflict in the Middle East.

Australian dollar futures (/6AZ3) are on track to break a four-day win streak, with geopolitical concerns weighing the risk-sensitive currency down. While news of further stimulus actions in China would typically boost demand for the currency. It looks like currency traders are taking a cautious approach to the trade. However, the current pullback may represent some profit taking. If markets shift their attention away from the Middle East, we may see /6A continue to move higher alongside a rosier outlook for the Chinese economy.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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