The setup would be much clearer if we didn’t have the Fed this afternoon

De-escalation was priced in?

When I saw the China headlines last night, I thought NQ and ES would rally 2% or more overnight and gold would be sub-3360. Instead, they are both close to unch. Meanwhile EURUSD is up, not down. It is an interesting non reaction to what seems like a major de-escalation. I understand there are many caveats:

• It’s a meeting to meet about a meeting, not to sign a trade deal.

• Stocks are already up a zillion % off the lows.

Nothing concrete is likely to come out of this as we are in a Groundhog Day replay of the “historic” 2017 China Trade Deal Phase One nonsense. That deal included a promise by China to buy at least $200B US goods over 2018 and 2019. They bought zero

While I understand the many caveats, I can still say with high confidence that if the market was mega short stocks, we would have rallied more than 0.37% on this! It’s another item to add to the list of reasons to be bearish stocks here

Good news/bad price

And the chart remains super bearish, with the NASDAQ, for example, right up in the moving average zone here. Bearish with a stop above 20,877 in NQ makes a ton of sense to me here, targeting 18,777 (risk 877 to make 1333). And while the price action in US stocks is soggy, the price action in China stocks was even worse

The setup would be much clearer if we didn’t have the Fed this afternoon, but my feeling is that the second the Fed is out of the way, stocks will head lower. I like playing it via short PLTR because of the double top at 125 and the remarkably similar price action around the February 125 top. This is barring some kind of wildly dovish outcome, of course, but I don’t see that happening. Their plan appears to be to wait as long as possible before turning back to cut mode, and there is nothing in the newsflow or economic data that changes that right now.

July FOMC pricing exactly one cut looks about right. The distribution as you go further out should get creative because I think there is a very good chance they wait, wait, wait, and then see a huge runup in the UR and start cutting in clips of 50 by Q3. Intentionally behind the curve looking for maximum certainty, then aggressive cuts—bam bam bam—is how I see it

There is this strange dichotomy of deflationary pressures from oil and a potential sudden stop in hiring and investment on one hand, and on the other hand, upward price level pressure from already sticky post-pandy inflationary psychology and tariffs. Tricky spot for the Fed—and for bond traders

Speaking of price action, the resilience of gold and EURUSD after the headlines last night is also incredibly encouraging for bulls, as is the hold of major support in EURGBP

If you work at a hedge fund and like EURUSD higher, as I do, but don’t like buying vol here, as I don’t… Selling one touches is a simple, limited loss way to be long EURUSD without long vol exposure. It’s a very similar payout profile to long spot with a stop loss, but allows for more restful sleep and a positive carry profile as it decays positively if spot doesn’t move.

For example, receive 68% for a 2-month 1.1214 one touch (in other words, buying a no-touch for 32%). Risking 32 to make 68 on that trade looks super attractive to me. Much better payoff profile than buying 1.17s, etc. because there is a risk we continue to consolidate in this 1.1250/1.1500 range. We have been here for a month; could be here another month. You can do the same thing in USDJPY with a barrier of 145.85 (off 143.35 spot). These are good structures for low maintenance, positive carry short USD trades.

FOMC

Hawkish Outcome (20%)

The Fed maintains rates at 4.25-4.50% while emphasizing concerns about tariff-driven inflation. Powell signals that rate cuts are unlikely in upcoming meetings due to elevated inflation expectations (which hit 6.5% in recent surveys - highest since 1981) and the need to keep longer-term expectations anchored. The statement acknowledges strong labor market data while highlighting upside inflation risks. Stocks close down 2.3%.

Neutral Outcome (70%)

The Fed holds rates steady at 4.25-4.50% and adopts a balanced, wait-and-see approach. Powell emphasizes data dependence, acknowledging both risks from tariffs: potential inflation pressure and economic slowdown. The statement notes recent soft inflation prints alongside rising inflation expectations, while maintaining that policy is well-positioned "for the time being" without committing to any particular path forward. Stocks close down 1%.

Dovish Outcome (10%)

The Fed keeps rates unchanged but signals readiness to cut soon, perhaps in June. Powell highlights deteriorating business confidence, weakening capital spending plans, and risks of rising unemployment. The statement acknowledges that recent inflation has been soft and emphasizes their commitment to act preemptively if data shows tariff impacts are significantly slowing the economy. Powell frames potential cuts as preventing unnecessary economic deterioration rather than countering a recession. Stocks close up 1.7%.

Note the bias to lower stocks given the good news/bad price setup.

Final thoughts

A monk had a beautiful, delicate teacup. His student asked him about the cup.

The monk said – ‘Every morning I drink from my favorite teacup. I hold it in my hands and feel the warmth from the hot liquid it contains. I breathe in the aroma of my tea. But in my mind the teacup is already broken. Because I know its fate, I can enjoy it fully here and now. When I put the teacup on the shelf and the wind knocks it over or my elbow hits it off the table and it falls to the ground and shatters… I say, ‘Of course.’