Your Next Trade Ep108 "Earlier Fed Cut"

Summary

This episode discusses recent market developments, focusing on the strength of US stocks post-option expiry, with gains of 3-5% in major indexes. Despite geopolitical uncertainties, such as tensions in the Middle East and tariffs, the market has been resilient, driven by strong earnings expectations and a shift towards more dovish central bank policies. Key catalysts include AI-driven tech stocks, with institutional investors returning to the sector, and a favorable macroeconomic environment. The episode also highlights the potential impact of upcoming economic data and earnings reports, while exploring the volatility and technical analysis of key assets like the S&P 500 and oil.

Takeaways

• 😀 The US stock market has been strong since the option expiry 10 days ago, with weekly performance between 3-5%.
• 😀 The market has faced geopolitical tension, such as the US attack on Iran, but recovered quickly due to reassurances from the Trump administration.
• 😀 Investors are shifting expectations towards strong earnings for Q1 and the upcoming earnings season in mid-July, which is expected to start with major banks like JP Morgan.
• 😀 AI and technology stocks are seeing a significant inflow of investor interest, with a focus on sectors like nuclear energy and electricity shortages.
• 😀 There has been a shift in expectations for central bank policies, with a growing probability of rate cuts from the Fed and other central banks in the near future.
• 😀 The market has been experiencing volatility, with the VIX (volatility index) indicating a 1% expected move daily. The dispersion trade has been a notable strategy.
• 😀 The strength of regional banks, technology stocks, and software companies suggests a bullish market sentiment, with tech outperforming the S&P 500.
• 😀 Energy stocks have underperformed due to a drop in oil prices, while tech stocks have been strong, rising 4.4% for the week.
• 😀 The Fed’s rate cut expectations have been increasing due to recent macroeconomic data, with inflation expectations coming down.
• 😀 The upcoming week includes key economic data such as PMI manufacturing, ISM services, and NFP numbers, which will influence market expectations, especially regarding central bank actions.

Q & A

What impact did the Middle East tensions have on the stock market?

The Middle East tensions, specifically the attack on Iran, caused some initial market uncertainty. However, the Trump administration quickly stated that the situation was a one-off, leading to a relatively calm market response. Despite a weak opening on Monday after the attack, the market rebounded strongly.

What is the current market sentiment in terms of central bank policies?

The market sentiment has shifted towards expecting more accommodative central bank policies. Initially, there were concerns that central banks, particularly the Fed, would be less accommodative due to inflation concerns. However, recent signals, including from Trump, suggest a higher likelihood of rate cuts, especially if macroeconomic data deteriorates.

What is the probability of a Fed rate cut in July 2025?

Currently, the probability of a 25 basis point rate cut by the Fed in July 2025 is only 20%. The market is mainly anticipating the first cut in September, with further cuts likely to occur in December. However, this could change if the macroeconomic data worsens.

How has the weakening of the US dollar impacted the market?

The weakening of the US dollar, which has seen a 10 to 15% decline, is a significant factor affecting asset performance. It benefits companies with international exposure, especially those with non-US revenues, as it boosts their earnings when converted to dollars.

What has been the performance of the NASDAQ and S&P 500 recently?

The NASDAQ and S&P 500 have both seen strong performances, with gains of 3-4% for the week. The market has been in a positive momentum, driven by strong earnings expectations and continued inflows into technology stocks, particularly in sectors like AI and semiconductors.

What factors have contributed to the strong performance of technology stocks?

The strong performance of technology stocks can be attributed to growing investor interest in AI and other emerging technologies. Institutional investors, in particular, have been buying tech stocks after reducing exposure earlier in the year due to concerns about inflation and tariffs.

How is the oil market currently performing and what factors are influencing it?

The oil market has seen a decline of around 12% for the week, mainly due to easing tensions in the Middle East. Oil supply remains abundant, and expectations for the second half of the year suggest that supply will continue to increase. This limits the potential for significant price increases unless there is a disruption in production from major players like Iran, Russia, or OPEC.

What does the VIX indicate about market volatility?

The VIX, which measures expected volatility in the S&P 500, is currently around 16%, indicating a relatively calm market with an expected daily move of 1%. Both implied and realized volatility have decreased, suggesting that the market is less anxious compared to previous months.

What is the significance of JP Morgan's performance for the overall market?

JP Morgan's performance is often seen as a leading indicator for the broader market. When JP Morgan performs well, it generally signals confidence in the economy, and this has been reflected in the broader market rally. The bank's strong performance has helped drive investor sentiment positively in recent weeks.

What are the key economic indicators to watch for in the coming weeks?

Key economic indicators to watch include the ISM manufacturing index, the ISM services index, and the non-farm payrolls (NFP) report. These indicators will provide insights into the health of the economy, and if the data shows signs of deterioration, it could increase the likelihood of central bank rate cuts sooner than expected.