Dow Jones & Nasdaq 100 Climb as Japanese Politics Fuels Yen Carry Trade

Yen Sinks, Stocks Rally on Japan’s Election and BoJ Outlook

US stock futures were on the move in early trading on Monday, October 6. Sanae Takaichi won the weekend election to lead Japan’s Liberal Democratic Party and potentially become Japan’s Prime Minister. Takaichi, a staunch supporter of Abenomics, is expected to increase fiscal spending and push for ultra-loose monetary policy to bolster the economy.

USD/JPY rallied 1.61% to 149.839 in morning trading as demand for yen tumbled on expectations of a less hawkish Bank of Japan rate path. Crucially, the prospect of ultra-loose monetary policy fueled yen carry trades, driving demand for risk assets such as US stock futures. For context, the Nikkei 225 soared 4.5% in the morning session.

US Government Shutdown Adds to Market Volatility

The yen’s slump against the greenback coincided with a potentially lengthy US government shutdown, raising expectations for aggressive Fed rate cuts. Kalshi currently predicts a 21.3-day shutdown, with 63% odds of surpassing 15 days and 52% for exceeding 20 days.

21.3 days would be the second-longest shutdown, trailing the 35-day shutdown in 2018-2019, during Trump’s first term. Economists estimated the 35-day shutdown shaved 0.4% off GDP. Fast forward to Trump’s current second term, and the impact could be more severe given the rapidly cooling labor market.

Notably, an extended shutdown would delay the release of critical economic data. Nevertheless, markets are betting on October and December Fed rate cuts, boosting demand for US stock futures.

According to the CME FedWatch Tool, the chances of back-to-back 25-basis point rate cuts in October and December are 94.6% and 83.0%, respectively.

How Are US Stock Futures Reacting to the Shutdown and Political News?

US stock futures began the week on a strong footing. The Dow Jones E-mini rose 57 points, and is eyeing a seven-day winning streak. Meanwhile, the Nasdaq 100 E-mini gained 83 points, and the S&P 500 E-mini advanced 15 points, recovering from Friday’s pullback.

Later today, traders should closely monitor events on Capitol Hill and Fed speeches. Bipartisan support for a stopgap funding bill could ease concerns about the potential impact of a shutdown on the economy. A reopening would likely shift market focus to looming US labor market data, including the delayed US jobs report.

However, FOMC members’ views on the economy, inflation, and interest rates will also move the dial. September’s ISM Services PMI dropped from 52.0 in August to 50.0 in September, fueling stagflation fears. Crucially, the labor market continued to contract, while price pressures intensified as service sector activity stalled.

The Kobeissi Letter commented on September PMI data, stating:

“Rate cuts into stagflation: The latest ISM Services report showed prices paid rising toward 70 and employment remaining below 50. As a result, we are now seeing the biggest gap between prices paid and employment since the 2020 Pandemic.”

Market participants should watch for any shift away from support for an October Fed rate cut over stagflation fears. A less dovish Fed policy stance could weigh on US stock futures.

Key Technical Levels for Dow Jones, Nasdaq 100, and S&P 500

Following the morning gains, US stock futures remain well above the 50-day and 200-day Exponential Moving Averages (EMAs), reaffirming a short-term bullish bias.

However, the near-term outlook hinges on developments on Capitol Hill, Fed policy signals, and upcoming economic data. Key levels traders are monitoring include:

Dow Jones

• Resistance: The October 3 record high of 47,323, 47,500.
• Support: 47,000, 46,500, 46,000, the 50-day EMA (45,672).

Nasdaq 100

• Resistance: October 3 record high of 25,197, 25,500.
• Support: 25,000, 24,500, the 50-day EMA (24,017).

S&P 500

• Resistance: October 3 record high of 6,800, 7,000.
• Support: 6,600, the 50-day EMA (6,543).

October Market Uncertainties: Key Risks for Traders to Watch

US stock futures eye a breakout session as concerns about BoJ monetary policy tightening subside. The US government shutdown may also pressure the Fed into lowering rates. However, concerns about stagflation could challenge market optimism, underscoring the importance of monitoring Fed speeches.

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