Gold sold, stocks stall

Although stock market optimism was aided by hopes for a breakthrough in U.S.-China trade talks at Thursday's planned summit in South Korea, the latest runup in U.S. stocks was once again driven by AI chip excitement and another upbeat series of business surveys home and abroad.

Qualcomm led the charge with a 13% surge after it unveiled two AI chips for data centers that will rival Nvidia's. Five of the "Magnificent Seven" tech megacaps report this week - with a combined market cap that's a quarter of the S&P 500.

U.S. futures and global benchmarks dialed back a bit today from Monday's heady highs, however, as the week's big events lined up.

Beyond trade and tech, attention was squarely on the Fed's likely rate cut on Wednesday and a possible end to its balance sheet runoff, or 'quantitative tightening' policy. A Bank of Canada rate cut is due the same day, with policy moves less likely at the European Central Bank and Bank of Japan meetings.

But even after mixed results from two big Treasury note auctions on Monday, yields have resumed their declines - aided by the glow of slightly below-forecast U.S. inflation readings last Friday. 

Even though there are doubts about when the October inflation update will now be released, amid the general outage of government data due to the ongoing Washington shutdown, short-run inflation expectations ebbed somewhat and bond market volatility plunged. The MOVE index of implied Treasury vol dropped on Monday to its lowest in almost four years, with the VIX equity market equivalent subsiding to its lowest in a month.

That provided the backdrop to gold's retreat.

Overseas, the Chinese yuan hit its strongest in more than a month ahead of Thursday's summit and Japan's yen climbed sharply too - with U.S. President Donald Trump touring the region all week and the BOJ meeting on the radar. 

As Trump met Japan's new Prime Minister Sanae Takaichi in Tokyo, Treasury Secretary Scott Bessent helped lift the yen as he called for "sound monetary policy" during his meeting with Japanese counterpart Satsuki Katayama, comments seen as a swipe at the slow pace of BOJ rate hikes.

And now onto today's deep dive.

Deciphering the Federal Reserve's money market system usually gives a headache to anyone outside of that world. But a possible end this week to the Fed's "quantitative tightening" policy may offer a boon to government and shouldn't be disregarded as mere financial wonkery. 

Another quarter-point cut in the Fed's main policy interest rate seems baked in for this week, so much so that attention is drifting to what might happen with its balance sheet management.

Graphics are produced by Reuters.

As Spain's economic growth outstrips all its euro zone peers, its blue-chip index IBEX 35 hit a new record high on Tuesday, surpassing its previous peak from November 2007 and closing a year in which it's outperformed every major European market. The bank-heavy IBEX 35 has been buoyed by a remarkable performance by domestic lenders so far this year. Shares in Santander, the euro zone's biggest bank by market value, have risen around 90% this year, while its competitors in the index have risen between 67% and 82%.

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