Whether by luck or good fortune, our ‘escalate to de-escalate’ prognosis last week turned out to be on target, with markets unwinding the Monday panic risk-off into fresh all time highs by the end of the week. A tentative ceasefire on Tuesday, leading to a ~15% turnaround in oil prices and other commodities. SPX broke new ATHs as we approached 6200, while BTC recovered most of its losses while making another challenge towards $110K.
Retail accounts have fared well again on this run, with GS’s ‘retail favourites’ index breaking to new highs as well after making a V-shaped recovery.
Implied volatility continues to crater with G3 rates vol closing the week at 3-year low, and overall risk volatility pre-Liberation Day troughs. Goldilocks is back alive and well with global fixed income staging a remarkable recovery and converging with stocks to achieve a near ~10% gain YTD, with the recent CB dovish pivots overwhelming any fiscal largesse concerns from earlier in the year.
S&P 500 earning guidance has been rising at an above average pace, with companies managing to weather the tariff noises so far. Moreover, to add fuel to fire, JPM recently released a model upgrade which suggests that equities have more room to run even at current valuations. For the curious, their new model is built to forecast SPX direction over a six-month horizon, focusing on volume, value, positioning, flows, economic momentum, and price momentum on a z-score basis. The most interesting finding is when stock market momentum is very strong relative to bonds, it often turns out to be a warning sign, while it also suggests that value tends to have opposite predictive power for future returns. Ie. The better the valuation, the worse the future returns, due perhaps to its complicated relationship on why things are cheap in the first place.
The JPM model currently predicts that the stock market has a 96% chance of rising over the next 6 months. Caveat emptor, this is not investment advice!
Outside of geopolitics, the big theme last week was in the notable dovish pivot from the Fed, where we saw Vice Chair Bowman and Governor Waller making a case for a July rate cut, versus the 20% market pricing. Powell supported the dovish view, albeit not a July cut, by stating that if it weren’t for tariffs (inflation worries), the Fed would be cutting already.
The Fed might have changed its mind due to worsening continuing claims and expectations of corporate layoffs, with asset prices effectively front-running this shift with terminal rates being lowered to 3% by end-2026.
With geopolitics in the rear-mirror, the focus over the next 2 weeks will be on NFP (3rd) and tariff deadline (9th). With the Fed having already shown their hand, markets will be extra sensitive to a weak NFP to confirm faster rate cuts, but that might not necessarily be bad for equities as assets remain squarely back with the ‘Goldilocks’ theme. Unless labour stats completely fall off a cliff, we expect risk assets to find their best excuses for a rally into and out of NFP this Friday.
The tariff deadline is scheduled for the 9th, though the market is expecting the first deals to be announced throughout the next couple of weeks. Current market expectations are for the top US trading partners (e.g UK) to have a 10%+ baseline tariff with certain exemptions, but the key will be on whether the US has indeed struck a done deal with China as stated by Secretary Lutnick from a few days ago.
Crypto prices made a similar recovery over the past week, albeit with less impact than stocks, as we still haven’t managed to recapture the YTDs though underlying flows are promising. BTC and ETH ETFs continued to see strong weekly inflows, with the former bringing in a whopping $2.2B in the week. Futures liquidations were quiet with not a lot of shorts being taken out during the rebound, suggesting much cleaner positions and the rally to be driven by fresh buying. A supportive equity market and a quiet summer might just be the ingredients we need to finally take prices to new highs — or at least one can hope!
Before we conclude, a quick look at macro’s latest favourite chart which plots SPX vs global liquidity. While we generally take exceptions to these overlays as they take a lot of liberties with time frames and assumptions, we’ll leave it here as a reminder of what the rest of the summer will look like if world events were to quiet down a bit. Good luck and good trading everyone!
