A Look at the Day Ahead in U.S. and Global Markets from Mike Dolan

Wall Street stocks are grinding out new records as U.S. growth continues to outperform. Optimism regarding interest rate cuts is rekindled and investors are observing overseas turbulence in French politics and Chinese trade.

U.S. equity indexes seem to be basking in a post-election, year-end glow. This phase has seen volatility gauges subside to their lowest levels since July, with the VIX 'fear index' now six points below historical averages.

Despite U.S. manufacturing remaining in the doldrums, the latest ISM survey showed a moderation in the contraction, contrasting with equivalent European surveys released earlier.

As factory gloom lifts, overall growth estimates are rising, with the Atlanta Federal Reserve's 'GDPNow' model forecasting an annualized expansion of almost 3.2% for the current quarter, outpacing the 2.8% recorded for Q3.

While Treasury yields saw a slight uptick on Tuesday, long-dated borrowing costs have dropped by more than 25 basis points in the past fortnight, likely influenced by rising overseas growth worries and fears of a global trade war.

Fed comments overnight have boosted hopes for another rate cut this month, nudging futures pricing to show nearly a 75% chance of this happening.

"As of today, I am leaning toward continuing the work we have started in returning monetary policy to a more neutral setting," said Fed Governor Christopher Waller. "Cutting again will only signify that we aren't pressing on the brake pedal quite as hard."

Fed Chair Jerome Powell is expected to weigh in with public remarks in New York on Wednesday, coinciding with significant labor market updates, starting with today’s October job openings report.

Attention on France

Meanwhile, Europe’s market attention is focused on France, where the government may face a 'no-confidence' vote this week due to a parliamentary impasse over the annual budget.

French government bonds are underperforming, with the 10-year yield spread over German equivalents reaching the widest since the euro crisis peaked 12 years ago. Despite this underperformance, French government borrowing rates have been declining, with 10-year nominal yields falling almost 25 basis points over the last month.

This trend helps ease pressure on the financial side, despite the wider spreads impacting the relative funding costs of French banks. The French stock market and euro saw a slight rebound on Tuesday, with the French/German debt spread also compressing a bit.

Even if the French government falls due to far right and far left votes, a basic holding budget could still be passed this month, while another election won't occur until mid-next year.

Part of the reasoning behind the dropping borrowing costs is the political stalemate in Paris and expected German elections early next year, which contribute to regional growth worries, compounded by trade war concerns, auto sector issues, and geopolitical tensions.

These factors increase pressure on the European Central Bank (ECB) to further cut rates, potentially even expanding the size of the cuts this month. ECB board member Piero Cipollone mentioned that U.S. President-elect Donald Trump's planned tariffs would likely lower euro zone economic growth and inflation.

Tariff concerns are also prominent in China, which faces another round of chip investment restrictions from the outgoing Biden administration. Expectation is building for a new round of monetary easing from the Chinese central bank, with Chinese 10-year debt yields dropping below 2% for the first time, leading to a depreciation of the offshore yuan against the dollar to its weakest level of the year.

Chinese main stock indexes had a wobbly start as chipmakers reacted to the U.S. crackdown but rebounded by the close. The focus is now also on potential Chinese retaliation.

China has announced a ban on exports to the U.S. of items related to gallium, germanium, antimony, and superhard materials with potential military applications.

U.S. stock futures were steady and slightly higher as they retained much of the recent upward momentum toward new records.

Key Developments to Watch in U.S. Markets:

• U.S. October JOLTS job openings data
• Brazil Q3 GDP
• Mexico October jobless report
• Fed Board Governor Adriana Kugler and Chicago Fed President Austan Goolsbee to speak
• Allied foreign ministers meeting at NATO headquarters in Brussels
• U.S. corporate earnings report: Salesforce (NYSE:CRM)