Global markets entered Tuesday with a increasingly mixed outlook. Stocks remain supported by the AI theme and corporate earnings, yet borrowing costs, oil prices, and inflation concerns are simultaneously rising.
This creates a scenario where markets appear calm on the surface, but underlying risks are mounting.
Stocks Still Rising, But Market Health Deteriorating
Wall Street is holding its ground despite intensifying pressure from the bond market.
Investors continue to buy into technology and AI stocks, anticipating robust corporate earnings growth.
However, the issue is that index gains are becoming increasingly reliant on a small group of large-cap stocks.
Fewer stocks are currently trading above their 10-day, 50-day, and 200-day moving averages. This indicates narrowing market breadth, even as the indices appear strong.
If this trend persists, even a minor negative surprise could trigger significant selling pressure.
US Borrowing Costs Rising
Yields on 10-year US government bonds have climbed to around 5.34%, while 30-year yields have hit approximately 5.70%—both reaching their highest levels since 2002.
Simply put, investors are demanding higher returns to hold US government debt.
This is crucial for equities because higher financing costs can weigh on companies and stock valuations, particularly within the technology and growth sectors.
Notably, this rise is occurring despite Friday's weak Non-Farm Payrolls (NFP) data and market expectations that the probability of a Federal Reserve rate hike in October is very low.
Inflation Concerns Persist
Data from the US services sector yesterday served as a warning signal.
While services sector activity continues to expand, cost pressures have surged to their highest level in over four years, suggesting that inflation may not yet be fully under control.
This is particularly significant given that oil prices remain high. If energy costs continue to rise, inflationary pressures could return, making it difficult for the Fed to adopt a significantly dovish stance.
Oil Remains a Risk
Oil prices continue to pose one of the biggest risks to the market.
The Middle East conflict, along with tensions surrounding Yemen and the Houthis, continues to raise concerns regarding energy supplies.
Meanwhile, the Trump administration is considering measures to alleviate diesel price pressures for US consumers.
Traders should monitor oil, as rising energy costs can impact inflation, corporate costs, and expectations regarding Fed interest rates.
Euro Falls; USD Regains Support
The Euro has dropped to its lowest level since May due to concerns over European politics and fiscal standing.
At the same time, the USD is finding support as US borrowing costs rise.
This makes EUR/USD and USD/JPY pairs to watch closely today.
USD/JPY, in particular, remains sensitive due to the significant interest rate differential between the US and Japan.
What Should Traders Focus On Today?
Forex
Focus on the DXY, EUR/USD, USD/JPY, and US Treasuries.
USD movements today will largely depend on shifting Fed expectations and the direction of US market interest rates.
Global Equities
Keep an eye on the Nasdaq, S&P 500, and AI and semiconductor stocks.
AI remains a key catalyst, but rising financing costs could increasingly act as a headwind for growth stocks.
Malaysian Market
Watch the ringgit, the KLCI, and technology and energy stocks.
The ringgit is sensitive to the USD, while local stocks may be affected by shifts in global sentiment and oil prices.
Commodities
Oil remains crucial, as it could determine whether inflationary pressures begin to rise again.
What’s Happening Today?
Market attention will remain focused on the Fed, oil, the bond market, and AI stocks. Traders also need to prepare for the release of the Fed minutes on Wednesday, which could provide a clearer picture of the debate among Fed officials following the September meeting.
For now, the market is not yet in a state of panic.
However, there are increasingly clear warning signs.
Stocks are still rising, but market breadth is narrowing. Oil prices remain high, borrowing costs are rising, and inflation has not truly gone away.
So, the question for today is not merely whether stocks will rise or fall.
The question is: how much longer can the market afford to ignore these mounting risks?
