Market's Risk Appetite Continues Climb as Tariff and Fed Deadlines Loom

Market's Risk Appetite Continues Climb as Tariff and Fed Deadlines Loom

Market benchmarks are pushing record highs, shrugging off lingering systemic threats commanding the headlines. Can event risk like PMIs, Tesla earnings or the ECB crack conviction?

Talking Points:

• We have passed the seasonal trough in the VIX (volatility) but that doesn’t mean the market will just turn trend
• The most disruptive event risk is not due for another week – FOMC decision, tariff deadline, top market cap earnings – but there is important event risk in the interim
• Top listing this week include: July PMIs, Tesla earnings and the ECB rate decision among plenty of additional listing

Risk Appetite is Spreading – Even if Conviction is Flimsy

We have brought to a close what is historically the lowest week of the calendar year for the VIX – the so-called ‘fear index’. Though there are years that deviate from this norm given the systemic matters playing out at any given period, it seemed the markets were more than happy to abide the seasonal expectations. And there were certainly opportunities for provocation in market volatility, from new tariff rate warnings from President Trump to growing questions over Fed independence to certain flags that economic potential is falling behind market enthusiasm.

Yet, through it all, the S&P 500, as a flag bearer for investor sentiment, progress to fresh record highs. Given the appetite for ‘riding the wave’ is spreading well beyond the typical outlets of concentrated risk appetite (top market cap stocks, AI representatives, emergent financial products like Bitcoin), the threshold for turning the ship around is higher; but we will wade into more turbulent macroeconomic waters over the next few weeks.

Chart of S&P 500 and 20-Day SMA with Consecutive Days Above/Below SMA (Daily)

 

Source: TradingView, Standard & Poor’s 

 

The Calendar Will Pick Up Second Half of the Week and Keep Running

If we were comparing density of event risk that can tap systemic market themes, the final week of July would represent at far more potent period with events like the controversial FOMC rate decision and important Magnificent 7 earnings on tap. That said, this coming week’s docket is no slouch and will certainly pick up into the second half of the week. The importance in gauging market impact is to consider how much potency there is in listings which is usually proportionate to both reach and breaking a strong conviction for a certain unremarkable outcome. While there are a number of noteworthy listings in the first half of the week (Canadian business confidence, PBOC rate decision, US money supply), the first major theme to take stock of seems to be the July PMIs from Standard & Poor’s.

Calendar of Top Global Macro Event Risk

 

Source: John Kicklighter

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Foundational Economic Activity Is a True Health Check

I watch these monthly figures closely as they tend to eventually align to the delayed quarterly government figures, and of course they are far more timely. The United States through June was still running at a faster clip of expansion on this series, but the global composite has been improving and there has been some measure of convergence by other major developed economies. Continued stability would add little to the already enthusiastic perspective in the market, but signs of trouble would probably draw the attention even the participants that don’t usually pay heed to this series.

Monthly Composite PMIs of Major Economies (Monthly)

   

Source: Standard & Poor’s

 

The First of the Mag 7 to Report Earnings

From the foundations of economic activity to corporate earnings, we will continue to run through the reporting of major companies’ financial performance this past quarter. The bank earnings this past week were generally green across the board, but rendered an uneven performance for the likes of JPMorgan, Goldman Sachs and Wells Fargo. Perhaps there will be more discernment – or blind conviction – when it comes to the Mag 7, the top market cap stocks that have drawn greater attention in this recent epoch of bullish reach. Last week, Netflix – a former high flyer in the FAANG group – reported a technical beat on earnings and revenue, but investors looked through the details of the performance and pressured NFLX down over -5 percent Friday to extend a three week losing streak.

I’m sure there will be those out there that think the likes of Nvidia is immune to this criticism, but this week we have perhaps the most controversial Mag 7 company due to report: Tesla. Given the stocks performance amid CEO Elon Musk’s fallout with the President along with all the threats to his businesses and attrition in the company’s ranks, there is not a small risk that this company is not going to show a strong figure. Further, the markets may be far more sensitive to numbers from this company than many others.

Chart of Tesla and Nasdaq 100 with 20-Day Correlation (Daily)

 

Source: TradingView

 

First the ECB and Then the FOMC In Second Half of July

The third, top listing on my radar this week is the European Central Bank’s (ECB) rate decision. There are a number of central banks reporting this week – including China’s and Turkey’s – but the ECB represents one of the largest aggregate economies in the world. More controversial nowadays – and thereby interesting for speculators to weigh in on – is the reality that President Trump is looking at benchmarks like this one to ridicule his local Federal Reserve.

The benchmark rate for Europe is 2.15 percent relative to the FOMC’s 4.50 percent standing, which adds considerable angst to the White House’s view. Furthermore, with Trump threatening a 30 percent tariff rate against the EU, to start August 1st unless there is a deal to head it off, there is a significant risk scenario for the central bank to consider in its calculus for its policy path moving forward. The market expects no change at this meeting, which seems reasonable. Yet, pay close attention to the messaging that follows any hold.

Chart EURUSD and EU-US 2-Year Yield Spread with 60-Day Correlation (Daily)

  

Source: TradingView 

 

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--- Written by John Kicklighter, Global Head of Content