Mixed signals
It was not long ago that many investment banks were warning clients of the risk of a slowdown in US equities. Having performed exceptionally well in the aftermath of the pause to Trump’s liberation day tariffs, many market participants warned of the inability of equity values to continue to enable price gains. Volatility indices have continued to fall as risk appetite has grown. In addition, softening US data continues to support the valuation of equities and treasuries.
Unsurprisingly, we have seen fewer such admonitions in client briefings warning of imminent collapses in US and global stock valuations. In fact, yesterday, Goldman Sachs highlighted in a note to clients that last week saw the most aggressive buying interest in US stocks amongst hedge funds in many months. Those stocks top of the list for this speculative portion of the market to acquire include those unsurprisingly expected to benefit from falling interest rates. Notably technology stocks will outperform in such an environment at the expense of equities such as utilities.
It is unlikely to be Trump’s unwavering pressure on the Federal Reserve that is pushing interest rate expectations lower. As we have covered, this can be a negative due to the undermining of US institutions. With the market pricing as of yesterday a 85% chance of a 25-basis point cut in September, there is momentum towards lower rates despite Powell’s own concerns of sticky inflation. Currently despite a definitive movement in treasuries and equities, the picture within the FX market remains mixed. Emerging market currencies continue to attract a bid from the carry trade outperforming majors. However, there is little decisive momentum amongst the G10 itself.
Discussion and Analysis by Charles Porter
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