Risk Rally Rolls On As ECB Day Arrives

WHERE WE STAND – The bottom of this barrel that I keep scraping to find interesting things to talk about of a morning is getting thinner and thinner by the day; welcome to ‘summer markets’, folks!

I shan’t use the dreaded ‘Q’ word to describe market action yesterday, at risk of jinxing things, but I think it’s safe to say that Wednesday was not exactly the most exhilarating day at the desk that any market participant has ever had. To be honest, we probably need to get used to this, likely until Labor Day in early-September, as trading conditions thin out substantially, and markets take on more of a meandering, subdued vibe. Want any more evidence of that? The VIX traded to 5-month lows yesterday, and vol selling is still probably a decent idea right now.

Despite the relative calm, we did hear from Treasury Secretary Bessent yesterday, as we seem to every day. Setting aside the usual positive rhetoric on trade, Bessent did make some interesting comments on the Fed, confirming that the process for replacing Chair Powell, and Governor Kugler, is being run simultaneously. In my mind, this raises the odds of history repeating itself, as the 2^nd Trump Administration takes a leaf out of the book that the 1^st Admin wrote, pairing Board nominees together in an attempt to make the nominations in question more likely to receive Senate confirmation.

I can certainly see a scenario here where a ‘mainstream’ nominee is paired with a ‘left field’ pick, like a Judy Shelton or Stephen Moore type character, in an attempt to ensure that both nominations are successful. Given that the second Trump Admin puts loyalty to ‘The Donald’ above any and all other characteristics, it certainly wouldn’t be a surprise to see that sort of thing play out. In any case, all this strengthens my base cases of a continued grind lower in the value of the dollar, as well as a continued steepening of the Treasury curve, as near-term dovishness leads to an un-anchoring of inflation expectations.

Besides that, there was relatively little for folk to get their teeth into throughout the day, even if fallout from the US-Japan trade deal did dominate for the most part, with a notable positive spill-over impact on EU assets, in the hope that a deal with Japan could pave the way for another with the EU, with rumours of a 15% tariff deal being close there doing the rounds yesterday.

Elsewhere, earnings from Alphabet (GOOG/L) were strong, delivering both revenue and profit beats, though a substantial hike in capex posed headwinds to the stock after hours. Tesla (TSLA), meanwhile, missed on both top- and bottom-lines, with the stock rather running out of charge afterwards.  

I was also very pleased, yesterday, to see news that both Tom Hayes and Carlo Palombo had their LIBOR convictions quashed here in the UK, a very, very long overdue ruling, even if it remains highly unlikely that the ‘powers that be’ who were ultimately responsible for the entire debacle will ever be brought to justice.

In any case, amid a dearth of significant catalysts, markets once more plodded along the ‘path of least resistance’. I feel I’m going to be writing that a lot over the next month or so.

As such, we saw equities gain ground once more, with the bull case of solid underlying economic momentum, strong earnings growth, and progress on the trade front going from strength to strength. I remain a bull, with momentum certainly favouring further upside for the time being.

In the FX space, most G10s moved sideways on the day, though the greenback was a touch softer against most peers, extending declines late on, amid positive murmurings on the US-EU trade front. Treasuries, meanwhile, were a touch softer across the curve, with losses led by the front-end, though we remain well within recent ranges, and dip demand is likely to remain healthy around the 5% mark in the benchmark 30-year.

Speaking of which, I’d expect dip buyers to emerge in gold before too long, after the yellow metal yesterday notched its biggest daily drop in almost a month. The continued erosion of Fed policy independence, and subsequent shifts in reserve asset allocation, should remain a healthy tailwind for the yellow metal, whose salad days remain to come.

LOOK AHEAD – Happy ECB Day!

I wouldn’t get too excited, though, in all honesty, as there has never been an occasion where a European has wanted to ‘rock the boat’ before a 6 week summer break, and the ECB are very much likely to stick to that vibe today. All policy settings will remain unchanged, with the deposit rate maintained at 2.00%, and the statement re-affirming policymakers’ commitment to a ‘data-dependent’ and ‘meeting-by-meeting’ approach to future decisions. President Lagarde is likely to repeat this at the post-meeting press conference, which will almost certainly be a drab affair, save for seeing which shade of mahogany she has decided to request at the tanning salon this week.

Another ECB cut isn’t my base case, but remains plausible, albeit not until September at the earliest, with such a move likely to come as a result of either a ‘no deal’ outcome in US trade talks, or in an effort to tamp down on further EUR strength. Don’t expect much on either of those scenarios today, besides policy being described as still in a ‘good place’.

Away from the dull affair in Frankfurt, there are a few other notable events on the docket. ‘Flash’ PMIs are due from pretty much every DM economy throughout the day, which should show a marginal MoM uptick in activity in both the manufacturing and services sectors. Besides that, the weekly US jobless claims stats are due, with the continuing claims print coinciding with the July NFP survey week, while the latest US new home sales figures are also on the slate.