Markets Drift As Risk Event Deluge Awaits

WHERE WE STAND – I posited yesterday that a ‘buy the dip’ day may follow a ‘sell the news’ one and it did, sort of.

Stocks started the day on the front foot, with those dip buyers out in force, before gains rather fizzled out as the day went on. Seemingly, my crystal ball doesn’t work as well as I thought it did.

Why the paring of gains? Frankly, I think it speaks to an understandable lack of conviction among market participants right now, as an FOMC decision, megacap earnings, the July jobs report, and another tariff deadline, all loom large on the horizon. It’s not surprising, amid all that, that we see position sizes come in, hold times shorten, and overall a more cautious tone prevail.

I reach for this as a narrative as, frankly, there wasn’t much by way of fresh info yesterday. The US & China trade talks ended, with President Trump now set to decide on whether to extend the present truce (which he almost certainly will), while incoming US data was mixed, as JOLTS job openings missed expectations, but the latest CB consumer confidence stats beat.

All that said, this is still a raging bull market, even if that bull has decided to take a bit of a pause for breath. The economy remains resilient, earnings on net have been solid, and progress continues to be made towards trade deals, as ‘left tail’ worst case scenario outcomes are avoided. I remain a dip buyer, with the path of least resistance still leading higher, and higher conviction in the bull case likely to return next week, after all that risk is out of the way.

I’m rather more content to say that my calls elsewhere have aged somewhat better. In the FX space, it wasn’t exactly the most exhilarating day yesterday, but we did nevertheless see the greenback consolidate its recent gains, with the DXY probing the 99 figure to the upside, and remaining north of the 50-day moving average.

Momentum still favours dollar bulls for the time being, for little reason other than the market appears to have run out of reasons to sell the buck, as progress is made on the trade front, the US economy remains robust, and Trump seemingly backs off his attacks on Fed Chair Powell. I remain of the view that, while in a longer-run dollar downtrend, this rebound could take the DXY back towards the 100 figure, which is also where the 100-day moving average continues to lurk.

As for Treasuries, dip buyers were out in force, as 5% on the benchmark 30-year, and 4.5% on the benchmark 10-year, again proved too alluring to resist, resulting in fairly sharp gains at the long-end of the curve. We remain, however, rangebound, with the 10-year having closed outside the 4.20% - 4.50% range just seven times in the last three months, and the 30-year having ended up outside its own 4.70% - 5.00% range just nine times in the same period.

The risk/reward, then, still favours buying dips as we approach the upper bounds of those trading bands, though not getting too greedy and taking profits off the table before we get to the tighter end of those bands, with fiscal worries likely to prevent gains from extending too far.

LOOK AHEAD – A very, very, very busy day up ahead.

Let’s start with the FOMC, who should stand pat on policy tonight, though Governor Waller, and possibly Governor Bowman too, are likely to dissent in favour of a 25bp rate cut. Besides that, the statement is likely to be a ‘carbon copy’ of that issued after the last meeting in June, while Chair Powell will also stick resolutely to his recent script at the post-meeting presser, reiterating that the FOMC are firmly in ‘wait and see’ mode for the time being. My base case remains that we see just one 25bp cut this year, probably in December.

Meanwhile, the Bank of Canada will also hold rates steady today, at 2.75%, though the updated round of economic forecasts will continue to be shrouded in a high degree of uncertainty, given ongoing tariff negotiations with the US.

On the data front, Q2 GDP figures are due from both the eurozone and the US. To get an idea of what the data will show, just turn the first quarter on its head. Back then, tariff front-running acted as a drag on US GDP, but boosted growth in the RoW; the opposite will happen in the second quarter, as that front-running unwound, though the figures remain far too noisy to be of any use. We also get the latest US ADP employment, and pending home sales, states as the day goes on.

For Treasury participants, focus will fall firmly on the quarterly refunding announcement. Having announced, on Monday, a need to borrow $1.01tln in the upcoming quarter, attention will now centre on how that is split across the curve, namely whether Bessent sticks with his plan to ramp up t-bill issuance, as well as whether guidance is maintained that coupon sizes will be unchanged for the ‘next several quarters’.

If all that wasn’t enough, we also have a deluge of corporate earnings, with megacap names Meta (META) and Microsoft (MSFT) highlighting things after the close. Given Alphabet’s solid beat, and increased capex guide, last week, participants will have high expectations going into the reports, as the AI arms race continues.

Oh, and on top of all that, we have President Trump probably rubber-stamping an extension to the China trade truce at some stage. A hell of a day is in store.