By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Stocks softened yesterday, while Treasuries advanced, and gold gained ground, in what proved a somewhat shaky start to the week. Today, a couple of US data releases, and plenty of central bank speakers, highlight the calendar.
WHERE WE STAND – A bit of a shaky start to the week, yesterday, ostensibly as participants continued to digest Friday’s Supreme Court tariff decision.
I must admit that does feel rather like pinning a narrative on the price action, particularly considering that trade was pretty risk-on in the aftermath of that ruling being handed down, and the Trump Admin unveiling their ‘global tariff’ backup plan, as last week drew to a close. Regardless, across the board we continue to trade within very tight ranges indeed, and net-net we’ve not really gone anywhere over the last couple of trading sessions.
We’ve not really gone anywhere on the tariff front either. While the 15% ‘global tariff’ is a headline-grabber, the overall average effective US tariff rate is, now, still a rounding error away from where it was prior to the SCOTUS decision. While one could argue that the 150-day limit on this Section 122 tariff could result in some uncertainty for US businesses, especially importers, that also broadly resembles the backdrop that we’ve had for the last year anyway. Also, I’d not entirely rule out a world in which 150 days passes, the Sec. 122 tariffs lapse for a day or so, before President Trump then re-enacts them for another 150 day period – I’ll let the legal experts weigh in on whether that would be feasibly possible.
Anyway, back to trade yesterday, and while tariffs are obviously taking up plenty of column inches, there are ample alternative reasons for participants to be approaching things with a little trepidation in the short-term.
Tensions in the Middle East continue to simmer, as ‘sources’ stories abound referencing the heightened potential for US military intervention in Iran, while we also have the spectre of Nvidia (NVDA) earnings tomorrow looming large over proceedings. On that, options imply an after hours move of +/-4.4% in the stock post-report which, while still pretty punchy for a $5tln market cap company, is the smallest such move that we’ve priced in the run up to a quarterly report since May 2023. Also thinning out conditions yesterday was likely the atrocious weather on the US east coast, with being ‘snowed in’ hardly conducive to heightened market activity, even in this age of working remotely.
Zooming out, however, the fundamental backdrop for risk assets is still a strong one, in my book. While monetary and fiscal tailwinds remain present, with both likely to grow stronger as the year progresses, the underlying economy is still in robust shape, particularly with last week’s Q4 GDP print having provided more ‘noise’ than ‘signal’ in light of the skew imparted by the record-long government shutdown. Earnings, meanwhile, remain very solid indeed – with 80% of the S&P having now reported, the index’s 9% YoY revenue growth represents the fastest clip since Q3 22, with the index also on track to notch a fifth consecutive quarter of annual earnings growth. Oh, and profit margins are at a record high just shy of 14%. None of that screams ‘bearish risk’ to me; quite the opposite, in fact! Hence, I continue to view dips as buying opportunities.
As for markets elsewhere, the FX & FI complexes are still a rangebound and turgid mess, all told. Though the dollar did soften to start the week, those losses simply took the DXY back to where we traded on Thursday, and really aren’t worth writing home about. Nor are the relatively modest gains that we saw across the UST curve, where the long-end led gains, but also where things are unlikely to get especially exciting unless and until the benchmark 10-year dips under the 4% mark. Still, we did see the benchmark 10-year Gilt yield trade to its lowest since Dec 2024, which provides some much-needed good news for Chancellor Reeves.
In truth, it remains the metals complex where the real excitement is taking place. Both gold and silver rallied yesterday, though the yellow metal provided more intrigue, clearing $5,200/oz, breaking to the upside of the recent range, and in turn printing fresh highs since the late-January carnage that is still fresh in many minds. Not only is the fundamental bull case still a robust one here, amid strong reserve and retail demand, but the technical backdrop looks solid too, with the prior range highs at $5,100/oz likely to now provide solid support, potentially teeing up a test of fresh highs in due course. I’d quite like, however, any journey to new highs to be ‘slow and steady’, as opposed to the speculative mania that we saw a month ago, given that the former would likely be considerably more durable than the latter.
LOOK AHEAD – A fairly light docket today, in keeping with the rest of the week.
A couple of second-tier US datapoints is all we have to get our teeth into, though neither the Richmond Fed’s manufacturing index, nor the Conference Board’s latest consumer sentiment survey, are especially likely to be market-moving. As such, another day of headline-watching on the trade and geopolitical fronts likely awaits.
That said, the US will sell 2-year notes this evening, while earnings from Home Depot stand as a useful bellwether for consumer spending at large. There’s also plenty of central bank speakers in the mix too, including six FOMC members, and four of the BoE MPC testifying to the Treasury Select Committee, as swaps continue to discount around an 80% chance of a 25bp cut from the ‘Old Lady’ next month.