By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Monday proved to be a textbook risk-on day for markets as Sino-US trade optimism swept across the board, seeing stocks charge higher, and havens such as gold soften. Today, tariff news flow remains in focus, amid a light data docket.
WHERE WE STAND – Well, it was a good, old-fashioned, risk-on day to kick-off the week yesterday; not a bad way to start a week that’s incredibly busy, but which also looks like it could well set the tone for the rest of the year.
In fact, it was as close to a ‘textbook’ risk-on day as you can get, with stocks rallying to new highs almost everywhere one looked, Treasuries rolling-over across the curve, and gold sliding along with other precious metals. Someone, though, obviously forgot to tell the FX market as, besides some notable demand in the AUD & NZD, most G10s meandered about in rather aimless fashion for the bulk of the day.
The trigger for this positivity was, of course, optimism stemming from the weekend US-China trade talks, which went about as well as anyone could’ve imagined. The two sides seemed to reach an agreement on almost everything that was up for debate with, of most importance to markets, Treasury Secretary Bessent noting that the US threat of 100% additional tariffs has ‘gone away’, and that China’s proposed rare earth export controls will be delayed for a year. All that leads to a ‘framework’ that Presidents Trump and Xi will discuss, and likely sign, on Thursday.
Consequently, having de-risked when the aforementioned tariff threat emerged a few weeks ago, then leant back into the ‘TACO trade’ when it appeared to be a negotiating gambit, participants now have renewed conviction to go all-in on this being yet another example of Trump’s ‘escalate to de-escalate’ strategy. While many will say that this is all just another woolly promise for the two sides to talk some more and for Trump to tout a ‘deal’ that’s not really worth the paper it’s written on, that’s very much missing the point. What’s important is that the ‘status quo’ can be restored, the trade truce extended, escalatory rhetoric ceased and thus, trade risks can fade to the back of participants’ minds once again.
It is against that backdrop that stocks rose to fresh record highs on Wall St, in a move that doesn’t look at all like one you’d want to fade. Megacap earnings this week could add further fuel to the risk-on fire, while the underlying US economy remains solid, the monetary backdrop continues to loosen, and the corporate buyback window is about to re-open once more. I’ve been calling for spoos to print 7,000 by year-end for a while now, but it seems increasingly likely that we’ll get there long before, maybe even next week! Plus, there’s little reason for the rally to run out of steam at that level either.
On earnings, incidentally, as we move into what will be the busiest week of Q3 reporting season, it’s been an incredibly strong one thus far. About a third of the S&P 500 have reported, with 83% of those surprising to the upside of revenue estimates, and 87% topping earnings estimates. Overall, blended earnings growth currently stands at 9.2% YoY, a very, very solid level indeed.
As stocks charged higher, so continued the momentum unwind across the precious metals complex, with both gold and silver facing chunky headwinds. Spot gold slipped back under $4,000/oz t yesterday, probably giving the bears a degree of control in the short-term. My base case, though, remains that this is more a period of consolidation than it is a longer-run change in the trend for the yellow metal.
In fact, such a consolidation would be no bad thing, here, especially considering that we still trade over 50% higher YTD, and wouldn’t be the ‘end of the world’ either, especially when the overall bull case remains a solid one, not least amid still-elevated levels of physical demand as reserve allocators continue to diversify.
Elsewhere, as noted, the G10 FX complex spent most of the day fast asleep, and my hopes are relatively slim that any of this week’s four G10 policy decisions can awaken participants from that slumber, not least given how minimal the potential for surprise is from any of the central banks in question. I stick, though, with my core dollar bull case, as the Fed’s ‘run it hot’ approach tilts risks to the outlook to the upside, and the market – eventually – back to the right hand side of the dollar smile.
Lastly, I found it noteworthy that despite some intraday pressure, the benchmark 10-year Treasury yield couldn’t sustain a move north of 4%. It feels increasingly as if Treasury operators are in ‘buy the dip’ mode, with that 4% handle looking like it could put a cap on things, from a yield perspective, for the time being.
LOOK AHEAD – Day 28 of the government shutdown, and there’s still no end in sight, but we do at least get some private sector US stats today.
Highlighting things, though I use the word loosely, will be the Conference Board’s consumer confidence gauge. The index is set to have fallen to 93.4, down from a prior 94.2, to a level that would be its lowest since April, mirroring the chunky decline seen in the UMich sentiment gauge last week.
Besides that, we get manufacturing data from the Richmond Fed, a 7-year note auction which should be taken down relatively well, and another busy earnings slate, highlighted by the likes of PayPal, UPS, and Visa.