28th July - Positioning For The Fed
In terms of geopolitics, the pause in fighting held for a second day, with the US and Iran refraining from any further strikes as work continues on restarting negotiations to end the war. The mediation effort, led by Pakistan and reportedly backed by China, remains the driving force behind the de-escalation. After nearly two weeks of escalation, two consecutive days of calm is the first genuine stretch we have seen, and the market is now treating this as a real de-escalation rather than another false dawn. It is worth stressing, as always, that this is a pause and not a peace, with the Hormuz question unresolved and the Houthis still active in the Red Sea, but the direction of travel has clearly shifted.
Oil has continued to reflect that shift. Brent closed overnight at $90.38, down 2.6%, with US Oil closing at $81.20, down 3.7%, and both are still falling this morning. Brent currently sits at $87.76, which is now almost exactly halfway between its recent high and its pre-war level. So the war premium continues to drain away session by session. This remains the single most important development for everything else, as oil has been the transmission mechanism into inflation, rates and risk sentiment throughout the entire conflict. In theory, this falling oil should be feeding cleanly into a weaker dollar, stronger equities and firmer metals. The interesting thing about yesterday, and the focus of today's post, is that we did not really see any of those expected moves. The most likely explanation is that the market is now positioning itself ahead of tomorrow's FOMC decision, and is reluctant to commit in either direction until it has heard from the Fed.
Forex
The dollar was the main story yesterday, and it did the opposite of what the falling oil price would suggest. I have argued for the past few days that last week's dollar strength was built on a safe-haven bid, and that a de-escalation would unwind it and expose the dollar to the downside. Instead, the dollar firmed on Monday. The reason, I believe, is the FOMC. The dollar has two legs to stand on, the safe-haven bid and the rate differential, and while the de-escalation has taken away the first, the market is unwilling to sell the dollar aggressively into a rate decision, particularly given how hawkish Warsh has been in refusing to soften even on weak data. So the rate-differential leg is holding the dollar up just as the safe-haven leg falls away. The asymmetric downside I described is still there, but it may need the Fed out of the way before it can play out.
The other majors mostly gave ground to the firmer dollar, though none of it was particularly dramatic. The EUR slipped back to 1.1368, giving up the recovery it made over the weekend, while the GBP fell to 1.3288 and continues to look the weakest of the majors following the Healey appointment. The USD/JPY ground a little higher towards 164 once again, keeping the intervention question alive as we head into the BoJ decision on Friday. The commodity currencies were the real surprise, with both the AUD and NZD falling despite the risk-on tone, which is not what you would normally expect on a day like this and again points to the market simply de-risking ahead of the Fed.
Indices
The relief rally that the futures had promised first thing largely fizzled by the close. The Dow managed to rise 0.51% to 52,210, but the S&P 500 was essentially flat, up just 0.02% to 7,413, and the Nasdaq actually fell 0.18% to 24,932. On a day when oil collapsed and Treasury yields fell, which is about as clean a risk-on, rate-relief backdrop as you could ask for, the tech-heavy Nasdaq closing red is a genuinely notable result. The NAS100 index also broke a significant combined level of technical support, as it broke through both the 100 day moving average and also the previous level of support at 28,000. This could be an important breaking point to give the NAS100, and by extension the Nasdaq Composite, room to move lower.
The drag came from two places. The first was energy, which makes sense, as the likes of Chevron and Exxon gave back the gains that had made them last week's refuge as oil fell away. The second, and more interesting, was Nvidia, which fell 5% and dragged the Nasdaq down with it. That is the key point for me. On a day the macro backdrop should have lifted the rate-sensitive tech names, the AI-capex concerns we have been tracking were strong enough to override it entirely. The spender-versus-supplier unwind now seems to have real momentum of its own, independent of what is happening in the Middle East. The proper test of this comes later in the week, with Microsoft, Meta and Apple all due to report, and after Nvidia's fall it is clear the market is still in no mood to forgive heavy AI spending.
Precious Metals
The metals told the same story as everything else yesterday, and it is the most instructive read of the day. Gold fell 0.50% to $4,077 and silver fell 1.84% to $58.71, with both continuing lower this morning to around $4,048 and $57.85 respectively. Now, this is exactly the point I have been making. Only yesterday I noted that falling oil reopening the rate channel was the catalyst the metals have been waiting for all year. Oil duly collapsed, and yet the metals fell anyway.
There are two reasons for this. The first is that a de-escalation is risk-on, and risk-on drains the safe-haven bid out of gold faster than the rate relief can support it, which is simply the worst of both worlds dynamic running in the other direction. The second is the firmer dollar into the Fed. This is precisely why the discipline of waiting for a clean break of $4,200 on gold and a hold above $60 on silver was the right approach. The catalyst arrived, and the metals still could not rally, because everything else lined up against them. It is a clear reminder that the metals do not just need falling oil, they need a genuinely dovish Fed to turn the rate picture, and falling oil on its own is not enough. That makes tomorrow's FOMC the real test. If Warsh acknowledges the easing inflation picture, the door finally opens for the metals. If he holds his hawkish line, then even collapsing oil will not be enough to lift them.
Today's Market Drivers
Iran - Until we have a real and lasting peace agreement, the situation in the Middle East will continue to have a major impact on global markets.
FOMC Positioning - Markets are likely to continue to position themselves ahead of tomorrow's FOMC meeting, meaning we could see some more counterintuitive moves ahead of the meeting.
AUD CPI, Tomorrow, 2:30 am UK Time - Overnight tonight we will see the Australian CPI prints. Unless there is a significant surprise, we would expect this not to have too large of an effect on AUD markets as they wait for the FOMC meeting.
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