S&P 500 Futures snap three-day downtrend, US Treasury yields retreat amid mixed clues

• Market sentiment dwindles as concerns over Russia, Fed challenge China-linked optimism.
• S&P 500 Futures lick its wounds after falling the most in a month, US 10-year Treasury bond yields fade week-start recovery.
• Pre-Fed blackout, absence of major data/events could allow traders to pare recent moves.

Global markets turn mildly optimistic during early Tuesday, after witnessing a downbeat start to the week. The reason could be linked to the absence of major data/events, as well as mixed catalysts surrounding the US Federal Reserve’s (Fed) next move.

While portraying the mood, S&P 500 Futures print 0.20% intraday gains around 4,011 while snapping a three-day downtrend. That said, the US 10-year Treasury bond yields fade the bounce off an 11-week low marked the last Friday, up three basis points (bps) to 3.56% by the press time.

It should be noted that optimism surrounding China’s economic growth, due to the latest easing of virus woes and re-opening appears to keep the traders hopeful. Reuters reported on Monday that China is on course to downgrade its management of COVID-19 from a top-level Category A infectious disease to a less strict Category B disease as early as January. The news came after Chinese President XI Jinping termed the previous jump in the virus cases as Omicron and mostly of mild nature.

US inflation expectations, as per the 10-year and 5-year breakeven inflation rates per the St. Louis Federal Reserve (FRED) data, also weigh on the US Dollar bulls and challenge the recently hawkish bias over the US Federal Reserve (Fed) by taking a U-turn from a one-month high. The latest prints of the 5-year and 10-year inflation expectations portray a pullback from the one-month high to 2.46% and 2.39% respectively.

On the other hand, New York Times (NYT) released a piece of news suggesting Ukrainian drones attacked military bases hundreds of miles inside Russia and escalated war fears.

It’s worth mentioning that Friday’s upbeat US data and Fedspeak challenge the dovish calls from the Fed, which in turn test the latest optimism. That said, US ISM Services PMI rose to 56.5 in November versus 53.1 market forecast and 54.4 previous readings whereas the Factory Orders also registered 1.0% growth compared to 0.7% expected and 0.3% prior. Further, S&P Global Composite PMI improved to 46.4 versus 46.3 initial estimations while the Services counterpart rose to 46.2 compared to 46.1 flash forecasts.

On Friday, the US Nonfarm Payrolls (NFP) surprised markets by rising to 263K versus 200K expected and an upwardly revised prior of 284K while the Unemployment Rate matched market forecasts and prior readings of 3.7% for November. Following the upbeat data, Chicago Fed President Charles Evans said, "We are probably going to have a slightly higher peak to Fed policy rate even as we slow pace of rate hikes.”

Looking forward, an absence of major data/events challenges the momentum traders and may allow them to consolidate the previous moves.