The current risk-on sentiment seems to have three drivers. US and China are to hold trade talks early October in Washington which has lifted general sentiment and the outlook for tariffs not being hiked again in October. USD weakness which especially accelerated yesterday partly due to flow reversion in GBP extending into other pairs is easing financial conditions and lifting emerging markets.
There also seems to be a green shoot element in the DAX futures momentum as traders are betting on Germany to increase government spending, as South Korea has recently done, and lately a rebound in some key manufacturing indices in Sweden which like Germany is a high beta country to global economic activity.
One asset class not supporting our current view of a short-term rally here in equities is gold with spot only inches away from the recent highs. Gold spot is down today but not by the magnitude if this was a one-way street in equities. Also, some credit spreads are also higher the last couple of weeks.
First the DAX and now the S&P 500
The initial breakouts from tight trading ranges happened in FTSE 100 and DAX futures driven initially by weaker GBP and EUR. In the last couple of trading sessions, the momentum has continued without the help from weaker local currencies reinforcing real price action for all the reasons mentioned above.
S&P 500 futures have the breakout crowd today pushing through the 2,945 resistance level that have been the blocker for weeks. With current events that have unfolded over the past week we see momentum extending from here in US equities. Weaker USD is key to fuel the move. A surprise tiering system announced at next week’s ECB meeting could be a massive catalyst for markets as it would elevate European equities across the board.