A relative calm

Markets

US stocks drifted modestly higher Monday, with S&P up 0.4% on more earnings beats even as US10yr yields up 4bps to 3.87%. as investors position ahead of a big week for corporate earnings and macro updates -- including the FOMC meeting, a fresh PCE reading, and 2Q GDP.

While the index trades modestly higher, most stocks in the S&P 500 are range-bound across sectors, with only a couple trading beyond +/- 5%. At the sector level, Energy and Financials are gaining ground, while Healthcare and Utilities are lagging in a bit of a pro-cyclical tilt. Energy has been a clear-cut winner as Oil prices soared as hopes build for China redoubling stimulus efforts.

With the VIX trading in the low teens, the relative 'calm' seems warranted amidst little news on the macro front to steer markets overnight. At the same time, ahead of a host of high-risk catalysts that lurk in the days ahead, most investors are likely opting to sit idle on current risk settings.

In macro this week, the FOMC meeting Wednesday will be key to watch. A 25 bps hike at the July meeting is fully priced. And with inflation prints surprisingly to the downside, pointing towards a continuation of the inflation normalization process, many think this could be the last hike of the cycle.

In micro, this is one of the biggest weeks for 2Q earnings, with more than 150 companies in the S&P 500 scheduled to release earnings, including mega-cap tech giants GOOGL, MSFT and META. While a critical focus for many investors has been the decisive run in the S&P 500 powered by Mega Tech's contributions to AI, unquestionably, the earnings results from the heavyweight giants of the index will garner the most attention.

Oil

Oil gained 2 % overnight against a backdrop of tight supply, as Russia’s crude shipments fell to a six-month low in the four weeks to mid-July. And when set against another bullish backdrop of China's redoubling stimulus efforts, the possibility of a US soft landing and the fall in US rig counts, the stars seem to be aligning for oil bulls this week.

Forex

After reaching a 1-year high in the first half of the month, EUR/USD depreciated sharply as Euro Area front-end rates sold off against US rates due to weak EU data and as disinflation came to Europe. While inflation is also ebbing in the US, the largest economy in the world is experiencing “ immaculate disinfaltion,” where growth is still holding up as cost pressures ease.

A set of bleak PMI triggered the overnight EURUSD sell-off. Manufacturing was down 0.7pts to 42.7 in July; consensus looked for a slight rise. And possibly even more worrying is Services also missed, down 0.9pts to 51 as the bleak PMIs foretell recession in Europe.

And the ECB rhetoric could be running out of puff after last week’s comments from Knot, a traditional hawk, got a lot of attention when he said a July hike was “a necessity,” but anything beyond July “would at most be a possibility but by no means a certainty.”