The market has pivoted into risk-on mode, as the modern-day playbook says Fed pauses are very friendly for Tech stocks. But beyond the Fed narrative, long-term investors were already looking through market dislocations early in the week as several mega-cap tech heavyweights are riding fresh longer-term growth tailwinds that could cut short any underperformance �" particularly on the adoption of Generative AI. This new twist will support the mega-cap tech constituents that hold sway on S &P 500 and supporting cast on the NASDAQ. The story's moral is never to waste a good crisis when tech stocks are involved.
Most of the G-10 currencies are predicatively benefiting from a "risk on" environment, but the EURO is not explosively so. I suspect the EURUSD is not sprouted wings just yet because fixed-income repricing has been relatively symmetric on both sides of the pond, so there are no giant leaps in the EU interest rate differential.
But if the Fed hints that disinflationary impulse from tighter credit will now do the heavy lifting in place of rate hikes, a switch will get flipped, and we will see an exodus of capital from the US market and weaken a dollar.
The CNY exchange rate has been spotlighted with declining export volume and weakening external demand. And so there is a bit of dog fight as some traders position for the PBoC to weaken the Yuan to increase exports via lower relative prices. In contrast, others are more worried about domestic inflation pressures suggesting the PBoC will keep currency policy steady.
With the more constructive risk environment, high-carry EM currencies have been among the top performers, recouping much of their prior positioning-driven underperformance. And the Mexican Peso has been benefitting from US growth pricing improving on the margin, with the amount of Fed cuts priced for the rest of the year declining and becoming less volatile. Still, Banxico's vigilance has been a critical pillar for MXN's performance, so today's rate decision will be necessary to watch. The unanimous consensus points to a slowdown to a 25bp hike, so the degree to which the forward guidance is softened will be the critical focus later today.
Oil has been running scared of the Fed for several months now. While we can debate its local relevancy for what the Fed does next, given everything else that's happening, the odds of them returning to "at all cost mode" is slim to none. So for now, until the US data tolls the recession bell, if broader markets remain in risk-on mode, oil could stay in relief rally mode supported by the same less threatening Fed, a slightly weaker US dollar, and hopes for the China recovery. And with OPEC JMMC around the corner, bulls can count on the OPEC put.
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