Peace Talks and Earnings Fuel Gains

MACRO FRAME

With another hold on policy, markets look to jobs data in the US and Fed speak, while the US-Iran backdrop continues to offer uncertainty.

STOCK INDEX FUTURES

Equity index futures moved higher overnight, with the Nasdaq and Dow both up around 1% ahead of the bell as earnings provide a bullish catalyst despite uncertainty on the US-Iran front. Caterpillar, the Dow’s second-largest component by weight, rose around 9% premarket following strong results. On the tech side, Palantir gained 14% following a strong second quarter. Investors continue to scrutinize AI‑exposed names this season amid speculation over whether or not heavy capex is translating into revenue and profit. Strong results from Microsoft and Amazon last week, combined with today’s prints, helping to underpin a rebound. Momentum sectors tend to overshoot both ways, and investors have begun to pick out winners and losers in the AI race, likely explaining the recent unwind in AI/semis as positioning rather than a clear fundamental deterioration. Of the 304 S&P 500 companies that have reported, about 85% have beaten estimates, vs. a long‑term average near 68%, supporting a push toward record levels. Later in the morning focus will shift to JOLTS data.

On the geopolitical front, Iran continues to effectively restrict traffic through the Strait, while the US maintains its blockade of Iran; Trump claims negotiations are underway and describes this as a “last chance” for Iran to reach a deal Iran denies this, saying that no talks with the US are taking place. However, markets have grown used to this backdrop, and the pause in fighting is giving room for risk sentiment to rise. Strong Q2 earnings and a lid on oil prices have also contributed to the bullish sentiment, which is likely to continue as long as fighting remains on pause.

CURRENCIES

US DOLLAR: The USD index is little changed at 99.91, maintaining its move below the 100 level from Monday. While, the market has not significantly repriced Fed expectations, remaining fully priced for a hike in December and favorable to a move in September, the pause in US-Iran fighting has lead to an unwinding of safe haven trades. The dollar has lost some support in interest-rate differentials, mainly in the form of policy-rate expectations, which have been a dominant driver of dollar direction in recent months. DXY remains particularly vulnerable to the divergence in policy expectations between Fed and ECB.  Markets are pricing a 63% chance of a move higher from the Fed in September and remain fully priced for a hike by year-end. Today’s JOLTS data is likely to shape dollar direction, though the stable labor market backdrop has lent more weight on inflation data in shaping Fed policy expectations so this year.

Watch point: While July’s meeting was taken as dovish, the geopolitical backdrop reinforces an inflationary theme among global economies leading policy expectations to be a dominant driver in currency direction.

EURO: The euro is marginally higher at $1.1513. The euro has gained as the pause in fighting between the US and Iran has given room to an increase in risk sentiment, while expectations are that the European Central Bank will be more hawkish than their US counterpart. This dynamic has seen the euro move higher on a narrowing of policy rate differentials and at-large market bullishness. Eurozone inflation figures for July suggested that underlying price pressures remain firm with services prices rising alongside non-energy industrial goods. Money market are pricing a 70% chance of a hike in September, while remaining fully priced in for a move higher in October. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction. With no improvement in tanker flows through the Strait, and even in the event of a peace deal between the US and Iran, the market will likely continue to price in risk premium, keeping European bond yields and policy tightening expectations elevated.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations.

BRITISH POUND: Sterling is 0.13% higher at $1.3446. A relatively light calendar week in the UK will lend focus to US-Iran developments and any developments in the new administration on Downing street. The drop in oil prices has proven supportive of the sterling, though an uncertain backdrop keeps risk premium elevated. The new government’s cautious fiscal stance has ease some investor concerns, which lent support to the currency in recent weeks despite the dovish message from the Bank of England at their latest policy meeting. Deputy Governor Clare Lombardelli, said on Thursday that her decision to keep rates on hold had not been a hard one. The Bank of England is now in a waiting period to assess the extent to which inflation will rise as a result of the US-Iran war and renewed rise in energy prices. Largely, the BoE is not seeing enough on the data front to abandon its wait-and-see approach. Money markets have fully priced a rate-hike come December in response.

JAPANESE YEN: The yen is 0.23% weaker at 157.55 yen per dollar. Despite slipping overnight, the yen is still maintaining most of its gains from the recent intervention. While the move by the US and Japan supports the currency in the near-term, a shift in fundamentals is needed to fully reverse the weakening trend. A large debt overhang and a Bank of Japan that has been slow to raise rates are factors in the way of the yen sustaining a durable rebound. While a hike come September could offer fresh support, the inflation trend in Japan does not appear to necessitate any urgency from policymakers to durably move policy upwards, despite recent comments from Ueda. Money market pricing is not fully pricing a hike until December, seeing a 36% chance of a September hike. The aim of the recent intervention is not just near-term FX stability but also to prevent a yen and JGB selloff from causing global spillovers, including extra upward pressure on already elevated US Treasury yields.

Watch point: With the recent intervention in the currency, the yen will need strong monetary policy support from the Bank of Japan to prevent further depreciation.

AUSTRALIAN DOLLAR: The Aussie is 0.51% stronger at $0.7034. An increase in risk-sentiment across the globe and strong consumer spending data in Australia is seeing the currency move higher today. Household spending rose 0.8% in June, driven by electric vehicle sales, per the Australian Bureau of Statistics. Spending for Q2 slowed a tick to 0.7% in real terms. While the data will not move the needle much for the Reserve Bank of Australia, it does support its hawkish stance and the bank could still move rates higher later in the year should inflation prove stubborn in Q3. Second-quarter inflation in Australia came in below forecasts, the downside surprise relative to expectations has shifted the policy bias towards a RBA hold for the remainder of the year. Markets are now see just a 3% chance of a hike next month, 13% in September, and are pricing the chance of year-end hike just under 50%. Still, last Tuesday, RBA Governor Michele Bullock said underlying inflation remained too high and a further slowdown in domestic demand may be required to tame prices, though emphasized that the rate outlook remains uncertain as it was not yet clear whether the three rate hikes already delivered would be sufficient.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields are modestly lower, though the curve has maintained its recent steepening move ahead of today’s JOLTS data and Friday’s labor report. The 2/10 and 2/30 spreads has remain near two-month highs, evident that the market could either be pricing higher inflation or stronger productivity growth in the aftermath of strong Q2 earnings and an AI-related productivity boom. The 10-year break even rate at 2.27% remains below its highs in May, suggesting that the markets reaction to Warsh’s comments may be overdone and that strong equity performance in recent days could be responsible for the bounce higher in yields. Oil prices retreated over the last two days, which has been and is likely to be a dominant driver in yield direction. Treasury Secretary Bessent said in a CNBC interview that a deal with Iran to reopen the Strait could come “today or tomorrow,” a move that would likely result in oil prices extending their decline. Today’s JOLTS data will be the next near-term catalyst for yields, though labor market picture remains stable, lending focus on the inflation front to determine yield direction.

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term.

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