The Fed drama

The day Donald Trump was re-elected for a second term as US President, we knew the headlines would be full of twists and turns. We expected surprising and unusual news every day—and yet, what we’ve seen so far has exceeded our expectations and prepared us for little. What’s happening feels surreal, and yesterday was no exception.

The New York Times reported that Trump had drafted a letter to fire Federal Reserve (Fed) Chair Jerome Powell and asked GOP members for feedback. This news brought nothing new—everyone knows the relationship between the two men is frosty—but the mere drafting of a letter made things feel more serious and triggered volatility. The US dollar dropped sharply, and the 2-year Treasury yield tanked amid expectations that Powell’s replacement would aggressively cut rates to please Trump.

Then Trump denied any plans to fire Powell, saying he was only discussing the idea in concept. I’m quoting Bloomberg here: “that he is only discussing it in concept”—the concept of firing the Fed Chair because he’s not making the decisions Trump wants, even though Powell’s decisions make sense given economic realities.

Markets caught their breath after this initial shock, but investors remain skeptical about what comes next. In Turkish, we say, “where there’s no fire, there’s no smoke.” Here, we know that the smoke is coming from a big fire. The consequences of such an attack on the Fed’s independence could be dramatic. Not only would the US dollar and Treasuries tumble, but the Fed would lose a superpower: the one that helps it support turmoiled financial markets by buying billions of dollars in US debt.

Remember, the US—and a few privileged economic zones—are unique in that government bonds can be supported by their central banks purchasing their debt. This is due to credibility. If that credibility is lost, the Fed loses its most important tool. Believe me, if the Turkish central bank bought Turkish government bonds to finance government debt—yes, even the sound of it is funny—that would just be printing money, which in theory should lose its value. If QE and the Fed’s expanding balance sheet have worked so well over decades, it’s because the Fed enjoys a level of credibility that few others do. If that credibility disappears, lowering rates would severely hurt both the dollar and Treasuries.

In summary: keep an eye on safer havens—it looks like we might see some serious action at the Fed this fall.

Big banks’ record trading revenues

Trump’s comments on Powell caused some selloff across major US indices, but the S&P 500 still managed to close with gains. Softer-than-expected PPI data helped cool mounting inflation fears after the previous day’s CPI print surprised on the upside.

Bank earnings continued to impress. Goldman Sachs’ equity trading desk, for example, posted its best revenue in Wall Street history. Morgan Stanley and Bank of America scored their best Q2 results on record, benefiting from the high market volatility driven by constant twists in White House policies with global repercussions. The SPDR Financial Sector ETF fell to a three-week low before rebounding, though its daily chart looks toppish after a 24% rally since the April dip.

Elsewhere, Nvidia consolidated gains near a record high. Alphabet extended modest gains to $185 per share on news that it will debut new Pixel-branded hardware at an event on August 20, including several smartphones and a smartwatch powered by its own AI technology. Given the market’s muted reaction, investors don’t expect this to be a ‘first iPhone reveal’ level event. But since the iPhone is falling behind tech peers in the AI race, the window to replace it with a new big gadget is wide open. Note that the iPhone has dominated for nearly two decades—much longer than predecessors like Nokia, Ericsson, or BlackBerry, who all had their star moments but for much shorter periods. I’m not saying Google will invent the next big thing, but AI is about to get a face. Who will deliver it? We’ll find out.

Speaking of AI, ASML reported better-than-expected revenue and earnings yesterday but still suffered an 8% post-earnings slump due to uncertainties about next year’s revenue growth amid trade restrictions. The stock fell off its bullish trend from April through yesterday. However, ASML remains the sole chip equipment maker for the world’s leading chipmakers, so its business outlook is tied closely to theirs. This dip could be an interesting buying opportunity, though the broad AI rally should be approached with some caution. The divergence between semiconductors and ASML suggests the two should eventually converge.

Zooming out, the Stoxx 600 index remained under pressure yesterday despite gains in the S&P 500, weighed down by ongoing trade tensions. European leaders have agreed to retaliate if the threatened 30% US tariffs materialize. Potential measures include taxes on US tech giants, targeted curbs on US investments in the EU, and limited access for US companies to bid for European public contracts.

We’ll see if Trump chickens out—and whether this triggers a market correction. I often watch market corrections from my summer vacation—and I’ll be on vacation starting tomorrow.