Markets Meander, Shrugging Off Geopolitics

WHERE WE STAND – Many participants will have spent the bulk of yesterday asking themselves ‘is this thing on?’.

That is, the participants that are actually still around. Judging by how much of a ghost town the Square Mile seemed to be yesterday, I think it’s pretty safe to say that we are well into the thick of ‘summer markets’ now.

In fact, a quick glance at implied vols would support such an idea – the VIX sits at, as near as makes no difference, YTD lows; BofAML’s MOVE index of Treasury vol is at its lowest since the first quarter of 2022; and, 1-week implieds across G10 FX all sit beneath the 10th percentile of their 52-week ranges. While this could well prove to be a ‘commentator’s curse’, I’d say that anyone desperate for vol probably shouldn’t go holding their breath, at least not until we hear from Chair Powell at Jackson Hole on Friday.

Frankly, the ‘world and his wife’ are waiting for those remarks, to see whether J-Pow leans into the market’s view that a September rate cut is a fait accompli, or whether the Chair seeks to preserve a much greater degree of policy optionality. The latter seems a much more likely scenario to me, given the deluge of data still to come before that September policy meeting, and could elicit a knee-jerk hawkish market reaction as a result. In an odd sort of way, Powell trying not to ‘rock the boat’ at Jackson Hole by sticking to his recent ‘wait and see’, ‘data-dependent’ script, would indeed rock said boat rather significantly, as a result of how sure markets are that a September cut is on the way.

Anyway, that’s all a matter for later this week. As for yesterday, geopolitics remained in focus, though concrete developments towards a Russia-Ukraine peace deal, or ceasefire, remain elusive. Yesterday’s 9-way talks in the White House appeared to yield little by way of significant progress, being very long on ‘noise’, but very short on ‘signal’, or definite next steps in attempting to resolve the conflict.

All of that, though, had relatively little impact on financial markets, with price action across the board being akin to watching paint dry. Stocks were flat, Treasuries softened led by the long-end, while the dollar gained a touch.

None of this is especially worth writing home about, though in the interests of good order, I’ll reiterate my stances – namely, as an equity bull, where solid earnings growth and a strong underlying economy, coupled with trade progress, should embed the ‘path of least resistance’ to the upside; favouring a steeper Treasury curve amid the continued risk of inflation expectations un-anchoring; and, remaining a dollar bear as the Trump Admin continues to erode Fed policy independence. We will, though, probably spend a lot of this week just plodding along in sideways fashion into Jackson Hole.

In other news, and in contrast to the move seen Stateside, BoE rate expectations continued to reprice in a hawkish direction as the new trading week got underway. The GBP OIS curve now favours no further Bank Rate cuts this year, while also discounting less than 50bp of easing over the next 12 months.

For me, it’s now time to start fading this move. In an economy as weak as the UK appears to be right now, particularly with the labour market continuing to soften at a rate of knots, this pricing appears far, far too hawkish. The risk/reward favours a dovish U-turn now, with just one soft-ish CPI report, or even some dovish overtures from the FOMC, likely being enough to turn the tide. I’d rather express this view in the STIRs space, however, by buying the Mar & Jun 2026 SONIA futures, as that’s a much cleaner trade than trying to pick a top in cable.

LOOK AHEAD – A pretty light docket today, as we wait for Powell on Friday, and as both trade and geopolitical tensions remain in focus.

In terms of scheduled releases, though, we do have the latest US housing starts and building permits stats this afternoon, though neither is likely to be market-moving. Nor is the July CPI report out of Canada, though markets do see a 1-in-4 chance of a September BoC cut, the outlook there hinges more on any tariff developments prior to the next meeting.

Finally, earnings are due from Home Depot (deh-pow, not dee-pow, thank you) before the market open, ahead of other retail earnings from the likes of Target tomorrow, and Walmart on Thursday. Not only will these figures be a useful gauge of consumer health, but participants will also be keen to see how the firms are navigating the ever-changing trade landscape.