It's been a rollercoaster month with a few genuinely nerve-wracking sessions. However, we're still not in full-blown panic mode—think of it more as a healthy correction. Investors and CTAs (Commodity Trading Advisors) are starting to trim their excessively high SPX exposures, which could alleviate some overbought anxiety. Nonetheless, the FX market has been quite the battlefield, especially for the Mrs. Watanabe carry traders who’ve had a rough couple of weeks.

The US tech giants, which have been the market’s darlings, are starting to show some cracks. The sheer concentration risk in the index’s top five, Magnificent Seven and top ten names is a bit terrifying right now. Although I usually downplay the risk in mega-cap tech stocks, seeing them as generational must-haves, there’s a rising concern. Our mid-July cross-asset hint about brewing trouble in broader markets was on point. But now folks are growing concerned that the massive investments in AI might not quickly translate into higher productivity or revenue. While high rates have boosted valuations for top companies ( Tech Titans are long cash), the anticipated rate cuts are making those premiums look less confident.

The phenomenal success of these stocks comes down to their solid business models, impressive revenue growth, and enviable profit margins. Despite the market's recent ups and downs, nothing indicates these fundamentals are declining. But, much like a balloon filled with too much air, high valuations and elevated positioning are causing some abrupt movements in share prices.

While buying the dip can often be a savvy move, there might be better options than the S&P 500, which is currently loaded with tech behemoths. Spreading your investments around could be a wise strategy, even if you’re generally optimistic about the market. Most stocks had a good showing on Friday, and with the Fed gearing up to cut rates, small caps, or even tech diamonds in the rough, financial reports could look even rosier—a situation that usually bodes well for the stock market.

As we edge closer to August, there's a rising concern about potential volatility and liquidity squeezes, which have kept me on the stock market sidelines for the last few weeks. After a strong rally in the first half of 2024, we might hit a summer speed bump due to weaker growth data and increasing policy uncertainty ahead of the US elections. And while CTA may have temporarily shifted into sell or profit-taking mode, SPX positions are still very elevated, so keep an eye on price action this week that might provide CTA tells.

So far, the market has thrived on the mantra "bad news is good news" for equities and risky assets, driven by hopes for central bank easing. Historically, Fed easing cycles have been a boon for equities as long as growth remains solid. However, if the safety net of monetary policy starts to fray, 'bad news' could really be bad news, more so if economic data takes a dumpster dive. The ultimate damper risk appetite could be the weaker global growth outlook, ongoing disappointing Q2 earnings, and rising US political uncertainty.

Let’s be clear: we’re amid a correction, not a bear market. Our long-term view is that equity valuations will expand, especially with central bank easing, ongoing AI enthusiasm, and potential growth acceleration on the horizon. But there’s a fair bit of nervousness from August to November, mainly if dip-buying gives way to a more substantial market downturn.

FOREX

The Bank of Japan (BoJ) is gearing up for its policy decision on July 31, and there might be some fireworks—possibly a rate hike. Back in March, the BoJ ditched its negative rate policy and yield curve control. Still, the yen (JPY) took a nosedive as the move was softened with ongoing JGB purchases and promises to keep financial conditions easy-peasy.

When the BoJ rolled out a “detailed plan” to cut bond purchases in June, the JPY barely blinked. We’re all on tenterhooks, waiting to see if they’ll speed up the timeline. Consumer spending is still in a slump, and there is renewed strength in the JPY from the BoJ hike and Fed cut expectations. They might be happy with the current yen trajectory and level of content to let the Fed do most of the heavy lifting. It’s like watching a high-stakes poker game, and everyone’s wondering if the BoJ will finally go all in.

We will look to reduce USD/JPY short on Monday for no other reason than to have a much better short position average near 159 USDJPY, which provides ample buffer into the BoJ.

Please mark your calendars for August 1 because the Bank of England (BoE) will announce its policy. I’ll be on the edge of my seat, betting long on GBP after the US rate-friendly PCE inflation report. The opinions here are as varied as a box of chocolates. The Monetary Policy Committee (MPC) has been dovish this year, with some members advocating for cuts. Despite this dovish tilt, we still grapple with sticky core and services inflation rates and surprisingly robust economic activity. It makes you wonder, “Why are we even discussing rate cuts?” The Bank might want to see more concrete evidence that this stubborn inflation is temporary before making any moves.

Whatever happens, it’s going to be a nail-biter. With nine policymakers, a few are holding out for steady rates, leaving the swing votes to break the tie. Governor Bailey and newcomer Claire Lombardelli will be the ones to watch. If they decide to join the rate-cut camp, we might see a majority shift.

Outside of the macro scrim, Goldman Sachs Research is quite optimistic about the pound's future, predicting it will strengthen against both the euro and the US dollar.

Our analysts revised their EUR / GBP forecast downwards to 0.83, 0.83, and 0.82 in three, six, and 12 months (compared with previous forecasts of 0.85, 0.85, and 0.84) respectively. In tandem, the forecast for GBP / USD has risen to 1.32 over a 12-month horizon, compared to 1.28 previously.( Goldman Sachs)

This confidence stems from a rosier global outlook and fewer domestic monetary policy or political uncertainties. Their updated forecasts for EUR/GBP and GBP/USD suggest a stronger pound over the next year. So, watch those exchange rates—they might brighten your day!

THE VIEW

The markets are as confused by the latest political twists as a bear waking up from hibernation in the middle of summer. Investors spent the first half of the year confidently betting on a repeat of the 2020 US election. Now, they’re confronted with a fresh, unpredictable political landscape, leading to wild day-to-day swings as everyone tries to make sense of it all.

As investors scramble to find their footing, the economy isn’t offering much help either. Conflicting signals are coming from every direction. The S&P 500 took a nearly 5% dive from its mid-July peak before bouncing back on Friday, while the once-mighty Nasdaq slid almost 8% from its recent heights. It’s like watching a tightrope walker juggle flaming torches—fascinating but incredibly nerve-wracking!

Bonds are having a wild ride these days. After an initial surge to nearly 4.5% on the so-called Trump Trade, the 10-year Treasury yield has now settled back to around 4.2%. But the real excitement is happening with the 2-year yield, which has dropped over 50 basis points in the last two months, landing just under 4.4% and creeping bullishly close to the 10-year yield. At one point last week, the 2s-10s curve almost un-inverted for the first time since spring 2022. Folk, there’s a lot of stuff going on here !!!

This rollercoaster at the short end of the curve reflects a growing belief that the Fed is getting ready to cut rates. This week’s FOMC meeting is expected to set the stage for a September cut, with some daring voices even calling for an immediate move. It's like watching a suspense thriller—will they or won't they? Stay tuned because the next chapter is bound to be riveting!

It’s starting to look like a September rate cut could be just the beginning of a whole series of reductions. Picture this: we always envisioned a slow, graceful descent down the interest rate elevator, but now it seems the markets are prepping for an express ride to the basement. There's even talk of bold 50 basis point moves if the US job market wobbles like a tightrope walker on a windy day.

However, let’s not forget that since the Fed began hiking rates back in March '22, the big market blunder has been jumping the gun on rate cuts—way too early and far too aggressively. So, while we’re almost tempted to leap onto the faster rate-cut bandwagon and back the truck up for paper gold, we’re holding out for clearer data before making any moves. Yes, it might mean missing out on a $50 per ounce bullion rally, but hey, we’re in it for the long haul with our physical gold stash, ready for just such occasions.

In the meantime, grab your popcorn and enjoy the show—keep an eye on those flaming torches!

FOREX VIEW FROM THE MARKET ( I think this is consensus from the 4 bank reports I have read)

The upcoming week is crucial for central bank policy updates. On Wednesday, the Bank of Japan (BoJ) and the Federal Reserve (Fed) will hold their latest policy meetings, followed by the Bank of England (BoE) on Thursday.

Bank of Japan (BoJ)

Many are forecasting a further 15 basis points rate hike from the BoJ at this week’s policy meeting, supported by an improving inflation outlook. However, the BoJ is under increasing pressure from leading Japanese politicians to tighten policy ahead of the LDP leadership election in September, which argues in favour of a hike next week. Despite this, there has been no clear indication from the BoJ that a rate hike is imminent, highlighting that it is far from a done deal.( smoke signals last week out of Tokyo would have been better last week for long JPY) According to Bloomberg, some BoJ officials favour delaying rate hikes due to concerns over recent weakness in consumer spending. Additionally, the BoJ is expected to outline plans to slow down the pace of JGB purchases, considering halving the current monthly purchases from around JPY6 trillion over several steps.

Federal Reserve (Fed)

The Fed is anticipated to leave rates unchanged next week, but we expect Chair Powell to at least acknowledge that they are moving closer to cutting rates at the September meeting. The June US CPI report provided compelling evidence that inflation continues to slow, and the unemployment rate is gradually increasing, strengthening the case for the Fed to begin lowering rates. The upcoming release of the latest nonfarm payrolls report for July and the Employment Cost Index for Q2 will be closely watched for further evidence of softening labour demand and moderating wage growth.

Bank of England (BoE)

The BoE’s policy decision next week is a close call. Many forecast that the BoE will begin cutting rates with a 25 basis points reduction, mainly based on guidance from the last MPC meeting, where some members' decisions to keep rates on hold in June were already finely balanced. However, recent economic data since the June MPC meeting have been mixed, and BoE Chief Economist Huw Pill has indicated he is unlikely to vote for a cut.

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