Equity to new Highs and Bravely Climbing the Wall of Worry: Market Trends and Key Drivers

We’re seeing positive flows in the S&P500 (+0.7%) and NAS100 (+1.2%), with both indices closing near session highs even if breadth wasn't too flash, with 57% of S&P500 stocks higher on the day. Taking a big picture view, the S&P500 and Dow daily charts highlight choppy underlying conditions, and both need work to get the momentum accounts fired up. It’s the NAS100 which appears to be the preferred long play in the near-term, with a test of the range highs of 22k the clear target for the bulls.

The Trump tariff news flow remains deafening and will continue to be so through the week as the reciprocal tariff rates are released either later today or Wednesday. However, with the 25% tariff announcement on steel and Aluminum lacking any trigger for broad portfolio de-risking and USD strength, the ability of risky markets to absorb the news and maintain a steady bid is telling.

Tariff Risk is So Readily Absorbed

We’ve been talking tariff risk for months now, and the markets have had time to price a scenario of frayed international relations, margin compression, a hit to earnings and end demand, with tariffs set to raise the price level - but what is going down just isn’t troubling risk and perhaps this is the sign that Trump is playing the negotiator, we’ve priced in a more troubled scenario or maybe we’re just over it and keen to refocus on the other factors supporting risk.

Simplistically, any market at or near ATHs portrays a bullish environment – how can it not be? Naturally, the bulls would like to see a firm breakout to new highs on a higher rate of change and increased participation, but that may still play out with the 12.4% aggregate EPS growth seen from S&P500 companies (in the current quarter) underpinning the buying flows. We look ahead towards Nvidia’s Q425 earnings (26/2) and while still two weeks away, traders are running NVDA longs into the numbers, with shares now eyeing a break of the 50- & 100-day MA, with traders not wanting to get left behind when they beat expectations – the question is always to what extent that beat looks like.

Reduced Volatility Supporting Equity Appreciation

A calm session in US rates and Treasuries – with limited changes in both US nominal and real yields - would also be helping risk sentiment and equity appreciation and that is spilling over into calmer conditions in the USD, with moves across G10 FX orderly on the day. USDJPY has had one of the bigger percentage changes, and we see the pair +0.3%.

Extremely low correlation within US equities is another factor playing into a stock pickers market and the frequent rotation - but it is also reducing S&P500 realised volatility - which, in turn, is seeing new capital from volatility-targeting funds (mostly pension and insurance players) come back into the market. S&P500 1-month ATM implied volatility now trades below 16%, with the VIX at similar levels and the reduction in implied equity vol speaks to a world of trader’s part rolling off downside hedges, and while cautious, active funds would not want to be overly hedged if the equity markets kick into and past Nvidia’s numbers.

One could argue that the US economic data flow is also a factor – where we’re seeing the data roll in neither too hot nor cool enough to trouble risk. It feels as though tomorrow’s US CPI print would need to be a real outlier to get the markets really pumping.

Commodities Working Well - Gold into $2911

Commodities are also feeding the beast, with a solid rally in energy – with crude +2.1% and Nat Gas +4.2%, while copper is +2.6%. Gold continues to kick with spot trading +1.6% and into $2911 with US-listed gold miners having a solid day’s trade. Momentum buying remains a factor, notably in the futures market, although one suspects CTAs would now be max long in their positioning. Many are fully aware of the buying from EM central banks, and while China hasn’t amassed the quantities of others (such as Poland or Turkey) they are a big psychological driver – additional news that China is eyeing a program to allow insurers to look at gold as an investible market is also fueling the buying.

Of course, gold players continue to watch and react to the migration of physical gold to Comex vaults in the US, and the ongoing scramble in London to be able to deliver anything that even looks remotely shiny. Gold and silver may be grossly overbought, but shorting the metal is a tough call for anything more than an intraday trade – Gold is hot, and until we hear some that radically changes the flow dynamics to Comex or improved wait times to receive gold from the Bank of England, then pullbacks should be well supported.

A Look Ahead - ASX200 Earnings and Powell in Focus

Turning to Asia we see our calls for the equity cash markets higher, but only modestly so. We see the ASX200 opening above 8500, with Macquarie set to offer a Q325 update and CSL set to report 1H25 earnings before the opening bell – typically CSL receives good attention from traders, but they will need to pull a rabbit out of the hat from its results to see investor interest lift, with shares at 12-month lows.

Trump will make two media appearances through early Asia trade – on Fox and the Matt Levin show. Data due out through Asia shouldn’t trouble risk too intently, while in the US we see NFIB small business optimism survey and some interest in Fed chair Powell’s testimony to the Senate Banking Committee (02:00 AEDT). In the UK we hear from BoE member Catherine Mann, who many will recall advocated for a 50bp cut in the recent BoE meeting – so one can expect dovish comments in this speech.

Good luck to all.