Thu Sep 19 06:47:00 UTC 2024: ## Fed Cuts Rates, Markets React With Uncertainty

The Federal Reserve surprised markets yesterday by delivering a more dovish rate cut than expected, cutting its overnight rate by 50 basis points and signaling a path towards a neutral rate of 3%. This marks the start of a new cycle for the Fed after over two years of pauses and pivots.

While the rate cut was welcomed by investors, market reactions were mixed, with the 10-year Treasury yield unexpectedly rising by 6 basis points. This rise could be attributed to the potential for the 10-year yield to trade 200 basis points higher than the 2-year yield, which is heading towards 3%-3.25%. However, market positioning could also be playing a role, and further analysis is needed to determine the driving forces behind this unexpected movement.

The S&P 500 rallied yesterday but ultimately closed lower, forming a “2B top” pattern that could signal a potential move below the August 5 levels. The NASDAQ 100 also struggled, failing to break above the downtrend line for the second consecutive day, indicating a potential move lower if it doesn’t break through soon.

The semiconductor sector, represented by the SMH index, reached the downtrend and the 61.8% retracement level for the third time, signaling weakness. Nvidia, a key player in the sector, remains below the $115 level, further hindering the movement of the semis and broader markets.

The USD/CAD currency pair, which has historically served as an indicator for S&P 500 tops and bottoms, is being closely watched. A break above the 1.36 level could confirm a downward trajectory for the S&P 500.

Furthermore, recent data from FINRA revealed a fourth consecutive month of declining margin levels, suggesting potential market weakness. Additionally, a drop in reserve balances to $3.22 trillion yesterday could signal a significant market drop in the near future, especially as the USD/JPY is no longer used as a funding currency.

Overall, the Fed’s rate cut has injected uncertainty into the markets, with potential for both upward and downward movement. The coming days will reveal if the recent market rallies were genuine or merely temporary, and whether the Fed’s dovish stance will truly stimulate economic growth.

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