Calm Before The Event Risk Storm Continues

WHERE WE STAND – Markets began the new trading week, yesterday, in a very similar vein to how we finished the last, amid a broad lack of conviction across the board, in a continuation of the ‘calm before the storm’ vibe that we saw on Friday.

At risk of repetition, the cagey and tentative nature of trade makes a lot of sense considering that the week ahead brings 5x G10 central bank decisions, plus a ton of impactful economic data releases. With such a packed slate of event risk looming large, it makes sense to see participants taking down position size, or even choosing to sit on the sidelines altogether.

The lack of impactful news- or data-flow through the day certainly didn’t give participants much reason to enter the fray either, besides a brief wobble in risk on news that China have found Nvidia to be violating anti-monopoly laws. Quite why this matters, though, when the Nvidia assume no sales to China in their guidance, and when China are advising firms not to buy Nvidia chips anyway, is beyond me. Still, I struggle to turn my laptop on most mornings, so perhaps am not best placed to comment on the tech sector!

Speaking of Nvidia, though, I did some digging yesterday, given that endless common inches seem to be getting taken up recently on the issue of equity market concentration, and narrow market breadth. For all that brouhaha, the best performing ‘Magnificent Seven’ stock this year – Nvidia – is only the 58th best performer in the S&P 500 at large. That hardly screams that we should be panicking about a tightly concentrated market, quite the opposite in fact, with the rally being relatively broad-based in nature.

That said, I do see some cause for caution in the short-term, even as the SPX & NDX hit new record highs. With money markets discounting ~70bp of Fed cuts by year-end, the bar for a dovish surprise from the FOMC tomorrow night is a high one, potentially an impossibly high one to meet. Hence, with a 25bp cut fully discounted, any guidance that J-Pow offers is likely to be interpreted as hawkish relative to how markets are positioned. As a result, it increasingly feels as if Wednesday’s FOMC meeting could shape up as a classic ‘buy the rumour, sell the fact’ event, especially with spoos having rallied 7% in five weeks since the August lows.

Still, even if some headwinds may crop up in the short-term, my faith in the longer-run bull case remains, hence I’d be viewing any equity dips as a buying opportunity. The underlying economy remains resilient, earnings growth is solid, calmer tones continue to prevail on the trade front, and an easier monetary policy backdrop over the next 6-12 months should also give the rally a nice helping hand. We might, though, if the FOMC proves a ‘sell the news’ event, need to get over the hump of typically negative EoM/EoQ seasonality first.

Away from the equity complex, there wasn’t overly much signal to be extracted from yesterday’s market moves – Treasuries firmed across the curve, albeit remaining inside last week’s ranges, while the dollar ticked a touch softer against most DM peers, in turn seeing gold advance once more & print a new record high.

Although that USD demand faded somewhat as the day progressed, it was enough to take cable to its best levels since early-July. To be completely clear, this is not some sort of sudden vote of confidence in UK Plc, but almost purely a reflection of a broadly firmer greenback, again helping to re-affirm my longstanding view that the best way to play the ‘bearish UK’ theme remains either short GBP in the crosses or, perhaps more simply, being short the long-end of the Gilt curve.

LOOK AHEAD – That deluge of event risk that I’ve been harping on about, starts today.

Last month’s US retail sales figures highlight the docket, with headline sales seen having risen just 0.2% MoM in August which, if realised, would be the slowest monthly rise since May. While the control group metric, which broadly represents the GDP basket, is set to post a healthier 0.4% MoM rise, participants will be watching the release closely for any signs that a stalling labour market may be seeing consumers begin to tighten their belts.

Elsewhere, the US also releases industrial production stats for August today, with production data also due from the eurozone. On this side of the pond, though, focus will fall firstly on this morning’s UK employment report, set to show unemployment having held steady at 4.7% in the three months to July, before participants turn their focus to the latest ZEW sentiment figures from Germany.

Rounding things out today, we have last month’s Canadian CPI which, despite likely rising back to 2% YoY shouldn’t derail the BoC from delivering a 25bp cut tomorrow, as well  as a 20-year Treasury auction tonight, which should go relatively well given how easily last week’s supply was digested.