Fed Decision, Tech Earnings and Gold Drop Set the Tone for the Trading Day
U.S. stocks hit new records as the Federal Reserve meets this week and megacap earnings return to the spotlight. Markets are pricing in a likely rate cut on Wednesday while traders also weigh a possible end to the Fed’s balance sheet runoff. In the short term this is driving a risk-on mood that has pushed equity benchmarks higher and helped Treasury yields fall. Over the longer term, outcomes on the Fed’s balance sheet policy could alter supply dynamics in money markets and affect borrowing costs across the globe. The move matters for the United States, Europe and Asia because it could change funding conditions and influence central bank decisions elsewhere.
Market backdrop ahead of the Fed meeting
U.S. stock indexes set fresh highs on Monday as investors priced in a quarter point cut by the Federal Reserve and prepared for a heavy slate of megacap results later this week. The possible end of quantitative tightening at this week’s meeting has become a focal point. That outcome would reduce the amount of Treasury and mortgage securities the Fed removes from its balance sheet. In the short run, a pause or stop in runoff could ease pressure on short-term funding markets and provide a convenient buffer for Treasury issuance, as suggested by recent commentary.
Bond markets reacted by driving yields lower after some mixed auction results. The MOVE index of implied Treasury volatility fell to a near four year low while the VIX dropped to its lowest in a month. Lower volatility and easing inflation expectations helped risk assets rally. The U.S. Treasury plans to sell $44 billion of seven year notes this week and a calmer market would smooth that process. For investors, the immediate question is whether a Fed rate cut alone will sustain the rally or whether changes to balance sheet policy will be required to keep liquidity ample.
Tech earnings and AI chips are powering sentiment
Technology momentum played a central role in the latest gains, with excitement around AI chips accelerating demand for semiconductors and related stocks. Qualcomm (NASDAQ:QCOM) jumped after unveiling two AI data center chips that the company says will rival Nvidia (NASDAQ:NVDA). That announcement pushed Qualcomm shares higher and helped lift other chip names.
AI driven expectations are concentrated in a handful of megacaps that carry substantial weight in major indices. Five of the so called Magnificent Seven report this week, and their combined market capitalisation represents about a quarter of the S&P 500. Strong results or upbeat guidance from these firms could extend the rally, while any disappointment would likely produce quick repricing given their market influence.
Gold’s slide and implications for risk appetite
Gold retreated back below $4,000 per ounce and has fallen more than 10 percent from this month’s peak. The metal’s decline fits the wider story of falling volatility and the expectation of easier policy from the Fed. When rate cut probability rises and real yields ease, gold can benefit. In this instance, the quick pullback suggests traders are favoring risk positions in equities over safe haven assets for now.
That said, a reversal in Fed communications or stronger than expected inflation data could restore demand for bullion. For now the market is treating the gold move as a sign that risk appetite is elevated and traders are prioritising equity exposure ahead of big corporate reports and the policy decision.
Global FX and overseas cues matter for the session
Currency markets provided notable signals overnight. The Chinese yuan strengthened to a more than one month high before a planned summit this week while the Japanese yen climbed sharply as U.S. officials put pressure on Tokyo for sound monetary policy. U.S. President Donald Trump met Japan’s new leader Sanae Takaichi and discussions included promises of accelerating military buildup and trade deals. Separately, Treasury Secretary Scott Bessent urged stronger policy in Japan during a meeting with his counterpart. Those remarks were read by markets as a nudge for the Bank of Japan to normalise policy, even though the BOJ meeting is on the radar later in the week.
In Europe Spain’s IBEX 35 hit a new record high and closed above its previous peak from 2007. Spanish lenders led the advance with Banco Santander (NYSE:SAN) noted as having rallied roughly 90 percent year to date. That performance has helped the IBEX outpace major European peers and reflects local banking strength and investor appetite for riskier European assets.
What to watch during the trading day
Traders enter the session focused on several scheduled data and policy events. The Fed will conclude its two day meeting on Wednesday and a quarter point cut is widely expected. Meanwhile the Bank of Canada is due to announce a rate cut on the same day while the ECB and BOJ look less likely to change policy at their upcoming meetings. October consumer confidence and regional Fed business surveys will also draw attention for fresh signs of demand and inflation momentum.
Corporate earnings add another critical layer. The coming days feature results from major names that can move sector indexes and overall sentiment. In particular, investor reaction to technology results will determine whether the AI driven rally keeps running. If megacaps deliver strong revenue and margin commentary it could reinforce the current market rally. If they fall short the recent gains could be tested quickly, given how concentrated returns have become.
In sum, the session will be shaped by the interaction of central bank signals, AI related corporate news and flows between risk and safe haven assets. Volume and volatility measures suggest traders are willing to take risk ahead of the Fed decision, but the potential end to balance sheet runoff raises questions about liquidity that could resurface if policy guidance shifts. For now equities are pricing in easier policy and tech optimism, while gold and volatility have retraced from recent peaks.
