Fed Decision Contends with SpaceX Trading Enthusiasm and US-Iran Headlines

We are facing the convergence of multiple, market-based storm heads over the coming week as enthusiasm over SpaceX IPO meets US-Iran deal headlines and a very controversial FOMC decision.    

Talking Points:

• Speculative appetite has preceded fundamental justification as of late – so what does the launch of SpaceX trading and a supposed US-Iran deal portend? 
• A risk-on designation would typically prioritize a seasonal lull in volatility, but the conditional backdrop suggests anything but typical quiet   
• Top event risk ahead is the highly controversial FOMC decision – Chairman Powell’s first at the head – but there are many central banks on tap as well as oil reports, inflation and more  

 

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Speculative Enthusiasm Hits a Frenzy with SpaceX IPO  

Despite the pullback in benchmark ‘risk’ measures in June, the markets continue to operate from a ‘sentiment first and fundamentals second’ perspective. This dynamic has prioritized momentum and exposure over lingering or long-term threats that have danced around the periphery. That has helped maintain the loft on global benchmark equity indices and further spread a bid to other outlets for speculative appetites to seek the increasingly elusive price discount to value.  However, as persistent as sentiment has held, there seems more and more admission to an exuberance that has stirred froth into current standings. Nevertheless, the parable of ‘markets remain irrational longer than you can solvent’ holds. Staying sidelined during a period of mania (a critical stage of the bubble cycle) can significantly reduce long-term returns, while fighting it can devastate accounts.

As far as looking for hallmarks that speculative interest is overdone, the rapid charge to record highs that the Nasdaq reflected after the US-Iran ceasefire was first announced was a strong signal. It is the tempo more than the arbitrary level that can presage the imbalance that leads to an eventual unwind. Another recent signal of potential hysteria on the risk spectrum was the record-breaking IPO by SpaceX. The space exploration company is not yet profitable, but that did not stop its debut from launching it into the top 10 American companies by market capitalization Friday. Given that this company could turn into a cross-industry platform (like Amazon between technology and e-commerce among others) that extracts extraterrestrial resources, there is a long-term value argument to be made on its behalf. However, this extreme concentration of demand speaks more to a need for capital to be deployed.

Table of Largest US Companies by Market Cap

Source: Companiesmarketcap.com; Nasdaq; John Kicklighter

 

Finding more fundamental value and greater return is a necessity in these saturated markets to carry the collective optimism…or complacency. A newly public, mega-cap stock can help absorb more of those funds; but SPCX alone is unlikely to sustain the next leg of enthusiasm alone. Before the company went public, we were seeing cracks form in the preceding benchmark theme that was fuelling bullish convictions: AI. The severe volatility – and short-term retreat – of standard bearers like the PHLX Semiconductor Index and Nasdaq 100 (especially relative to the Dow) just a week before reflected the conflict. Earnings forecasts were starting to fall short of the unrealistic expectations attributed to the tech giants leaning aggressively into the theme. 

How distinctly does the market associate SpaceX to artificial intelligence given it is only a component of its portfolio? That is unclear, but the expected future IPOs of OpenAI and Anthropic will be explicitly linked. Thematic perspective is more likely to dictate its contribution to sentiment rather than the availability of new contributors would. So, unless there is a pivot in guiding light for bulls – perhaps from AI to multi-dimensional platform mega cap companies – it may be difficult to readily extend the enthusiasm. 

Chart of Nasdaq 100 with Key Events and 1-Day Rate of Change (Daily)

Source: TradingView.com; John Kicklighter 

 

Risk Appetite Flashes Will Fight Against Seasonal Norms   

SpaceX was a clear flashpoint for bullish interests in the market this past week, but it wasn’t the only potential source of lift the speculative rank could have drawn from for conviction. The headlines were once again stuffed with optimistic takes of an imminent ‘deal’ to be signed between the United States and Iran following its tumultuous ceasefire period. After so many false starts and reversals in messaging, we can forgive the markets for not seizing upon the comments to restore the S&P 500 and other benchmarks to record highs. From a technical perspective, the pattern maintains the perspective of confliction, holding below the week’s highs (materially lower than the June 2nd record) and the 20-day simple moving average. If there is an agreement to be found, how far could we expect this heavily-discounted risk – with complications to restoring the return to pre-war order and inventory levels at best – to provide further lift?  

Top Google News Search Themes for Financial Markets (Daily) 
 
Source: Google Trends; John Kicklighter

 

Between the exhausting of ‘positive’ fundamental themes like AI and IPOs and the limited discount afforded to the carry over risks of the Strait of Hormuz closure or turn in tide of global monetary policy, it isn’t clear what the greatest untapped potential would be to pick up the torch for maintaining the climb in global markets. There is always the potential for something new to emerge – particularly if the undercurrent of enthusiasm persists. Then again, if a new – or old – champion doesn’t step up, then seasonal forces can exact familiar weather patterns upon the markets. Historically, we are moving through the period of the year that market activity downshifts with a last peak in volume before the collapse in turnover and volatility through early July. The volatility – implied and actualized – we have seen recently diverges from the norms, but it isn’t so far off the relative norms that it suggests we face an outlier that persists into the ‘doldrums’. That said, if volatility remains elevated against a backdrop of inflated market prices, the counter-cyclical pressure could inspire a persistent deleveraging.  

S&P 500 Average Performance and Implied Volatility by Calendar Week

Source: Standard & Poor's; John Kicklighter

 

There is a Clear Traditional Macro Theme on the Docket

With so much competition for the market’s collective attention from the headlines, it can be easy to ascribe the coming week’s course setting and tempo to the popular structural themes. However, the global macro docket will make a strong bid for seizing the reins. There are plenty of high-profile events to keep track of from the G7 Leaders Summit headlines to China’s broad statistics for the month of May to a variety of trade, inflation and sentiment statistics. However, the clear thread through the week with significant potential is in monetary policy with a run of meetings from major central banks. Given the backdrop of elevated inflation with chastened growth, the perception of a general shift from growing accommodation towards temperate restriction threatens a countervailing force to capital markets coasting to fresh record highs. 

Calendar of Top Global Macro Event Risk
 
Source: John Kicklighter

 

A Controversial FOMC Decision That Sets the Tone for Years Ahead  

Top event risk from the macro docket this week is Wednesday’s FOMC (Federal Open Market Committee) policy update. The outcome of this meeting in regards to the benchmark lending rate’s setting is the least controversial element of the overall event. The markets ascribe near certainty that the central bank will hold its benchmark unchanged (at a range of 3.50-3.75 percent). The real drama comes from the messaging changes that could come under the new regime of leadership by Chairman Kevin Warsh. The newly installed central banker – who had a previous stint as a board member – has historically taken a more conservative approach to policy whereas his benefactor, President Trump, has previously voiced demands for extreme easing. 

I believe it is inevitable that Warsh will disappoint the president as he maintains a personal adherence to the ‘dual mandate’, while his views are averaged out by the other voting members of the central bank. Where he can have a material impact on the market-moving potential of this, and future, central bank decisions is whether he decides to eliminate forward guidance. That is the Summary of Economic Projections that includes the contentious ‘dot plot’ and where the market has anchored much of its policy discounts. If realised, the markets will either draw more surprise from future rate decisions or individual central bankers’ remarks will leverage far more attention. And, make note to watch Warsh’s press conference half an hour after the decision to evaluate how he intends to conduct his era as head of the world’s largest central bank.

Table of FOMC Policy Decision Scenarios

Source: John Kicklighter

 

The BOJ Holds the Most Interesting Central Bank Decision for the Week

While the Federal Reserve represents the most seismic policy update for the week through both global reach and long-term course setting, the most acute decision will go to the Bank of Japan (BOJ). The Japanese authority is expected to hike its benchmark rate the fifth time in the past 15 months. A 25-basis point increase would raise the country’s overnight rate to a three-decade high 1.00 percent. This is unusual in may different ways. This is a persistence of tightening that is more ‘hawkish’ in orientation than most of its counterparts. Then again, its starting point is still extremely low relative to many of its largest peers – like the Fed’s 3.50 percent, BOE’s 3.75 percent and ECB’s 2.40 percent for example. In a ‘risk on’ oriented environment, the Yen still reflects a funding currency for the carry trade, as a compass setting for capital seeking higher returns. Furthermore, the Ministry of Finance has made a very public – and thus far failed – attempt to arrest the Yen’s depreciation to near 40 year lows (above 160 for USDJPY). Intervention has not worked, but closing the carry gap and/or a significant reversal in risk trends has historically rendered better results with exchange rates.   

Chart of USDJPY Overlaid with US-Japan Benchmark and 2-Year Spreads, VIX (Monthly)

Source: TradingView.com; Federal Reserve Economic Database; John Kicklighter

 

A Slew of ‘Other’ Central Banks: BOE, RBA, Brazil, SNB, Taiwan, Russia   

While there will be a reasonable focus on both the US and Japanese central bank rate decisions over the coming week, they are not the only listings worthy of our attention. We should note the updates on policy due from Australia (Tues, 4:30 GMT); Brazil (Wed, 21:30); Switzerland (Thur, 7:30); Taiwan (Thur, 8:30); the United Kingdom (Thur, 11:00) and Russia (Fri, 10:30). With the exception of the CBR, which is seen cutting its benchmark 50 bps, these central banks are expected to hold steady. That does not mean that they will not adjust their forecasts and warnings, however. Looking at the collective from a larger time frame, we can see that a broad hold would still reflect an adjustment period from 2024-2025’s general easing phase that happened to align to a persistent ‘risk appetite’ backdrop for markets. With inflation notably moving higher, will these groups follow through on further withdrawal of liquidity from the system that exposes speculative over-reach?  

Chart of ACWI World Equity ETF with Aggregate Benchmark Rate (Monthly)

Source: TradingView.com; iShares; IMF; John Kicklighter

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-- Written by John Kicklighter, Global Head of Content