Markets Bought The EU Deal Rumour, Then Sold The Fact

WHERE WE STAND – A bit of an odd one, yesterday, as we started off with things looking all ‘fine and dandy’, then ended with things all looking rather indifferent.

The ‘fine and dandy’ vibe came in reaction to the weekend announcement of a US-EU trade deal, with imports from the EU set to be subject to a 15% tariff, including those from the all-important autos sector. As noted yesterday, such a tariff is chunky, but it’s half the 30% levy that had been scrawled in Trump’s letter earlier this month, and much better than the 50% duty that had been threatened before that.

In any case, what we saw yesterday was a combination of a classic ‘buy the rumour, sell the fact’ reaction to the weekend’s news, coupled with a realisation that the deal isn’t exactly a boon for either economy, and more just represents the removal of a huge chunk of left tail risk, as a ‘no deal’ scenario has been avoided. There’s also an understandable lack of conviction among market participants in the mix here, with a bumper week ahead including megacap tech earnings, the FOMC decision on Wednesday, and Friday’s jobs report.

Anyway, even if the market didn’t seem especially enamoured with the deal, and stocks on Wall Street ended flat, I think a look at the broader situation is needed here. For a while now, I’ve been harping on about how the direction of travel on the tariff front remains towards deals being done, and towards calmer heads prevailing. That remains the case, with the last week having seen deals done with both Japan and the EU, among others, plus ongoing US-China talks in Stockholm set to result in another extension of the present trade truce.

All that, naturally, helps to provide further support to the equity bull case, especially when coupled with solid earnings growth, resilient incoming economic data, plus corporate buybacks being likely to resume soon. We might, though, need to move past this week’s plethora of event risk, before the slow but steady upwards drift in the equity complex can resume with a bit more conviction.

What follows a ‘sell the news’ day? Probably, for stocks at least, it’s a ‘buy the dip’ one.

Anyway, that vibe of early moves fizzling out aptly describes what went on elsewhere too, namely in the FX space.

Having gapped higher as trade resumed, the euro then proceeded to sink over 1% on the day, slicing beneath the 1.17 & 1.16 handles like a hot knife through butter. It is, though, a little uncharitable of me to put this down entirely to EUR weakness, as what we actually saw was fairly broad-based USD demand, with cable taking out 1.34 to the downside, USDJPY popping north of 148, and pretty much every other G10 ending the day in the red as well.

I reckon what we have here is the market having, temporarily at least, having run out of fresh narratives to be short USD. Progress is being made on the trade front, and ‘no deal’ outcomes avoided; the underlying economy remains resilient; Trump, for the time being, has backed off his attacks on Fed Chair Powell; seasonality points to the buck tending to bottom out in late-July; plus, EoM flows could be providing some support. On top of all that, recall that the DXY has already lost about 10% this year, so we’ve come a very long way, in a very short space of time.

Dollar bulls, though, will be pleased to see us having closed, in the DXY, north of the 50-day moving average yesterday for the first time since mid-Feb. This probably gives the relief rally a bit more legs, and puts the 100-day moving average, coincidentally bang on the 100 figure, as a level that those bulls will have in their sights. Crudely, via some back of the envelope maths, that would take cable to 1.30ish, the EUR back under 1.15, and USDJPY towards the 150 figure.

One other thing of note here, see chart below, is that the buck still has a heck of a long way to catch up with the equity market rally. Could we see stocks drag the greenback higher over summer? I certainly wouldn’t rule it out, even as a longer-run dollar bear, albeit one who will probably sit on the sidelines in terms of that view for the time being.

LOOK AHEAD – A busy-ish docket ahead today, though still somewhat the ‘calm before the storm’ ahead of the FOMC, and some megacap earnings, on Wednesday.

As for the ‘here and now’, today’s data highlights come from the US, in the form of the June job openings stats, as well as this month’s consumer confidence data. The JOLTS survey is set to point to a modest drop in job openings, at 7.550mln last month, while the Conference Board’s confidence index should rise 3pts to 96.0, broadly in line with the uptick seen in the UMich survey earlier in the month.

Elsewhere, a 7-year Treasury auction is scheduled this evening, though should be taken down relatively well, while notable earnings today come from the likes of PayPal, Boeing, Visa, and Starbucks.