Market Outlook: Stocks, Gold, FX & Risk Sentiment Before FOMC & BoJ

The US trading session has seen sentiment sour with expressions on a cross-asset basis action turning more cautious into the key bank meetings. Funds have been better buyers of equity volatility (S&P500 1-week implied vol +2.5 vols at 21.1%) with renewed selling flows seen in the MAG7 basket (-2.5%), with the heavyweight equity plays weighing on both the S&P500 and NAS100.

After a two-day run with c.90% of S&P500 stocks closing higher on both days– a factor which typically bodes well for equity appreciation on a 1-month lookahead basis – we see 68% of S&P500 companies closing lower on the day, with S&P500 Energy and Healthcare the only sectors modestly higher. S&P500 futures were offered from the equity cash open, with the sellers taking the futures into 5600 and Monday’s low, before the buyers stepped back in and supported at the round number support, with some noticeable volume spikes into 5600.

Technically, the US equity indices run the risk of completing a bear flag continuation pattern, where after two consecutive daily higher highs and lows, both NAS100 and S&P500 futures have breached rising channel support, increasing the risk of a continuation of the drawdown seen from 19 February.

At a stock level we’ve seen some good two-way interest in Meta, Alphabet and certainly Nvidia over its GTC Conference - while we’ve heard several key announcements from Jensen Huang which have supported the stock at $114.54, the Nvidia bulls have failed to fire up on the news flow. Tesla remains a favoured play for the equity shorts, where tactically holding small positions looks attractive, with a view to adding on a close below $217.02 and cutting shorts on a close higher above the gap at 232.80.

Gold Remains in a Strong Bull Trend

On a cross-asset basis, we continue to see good trading flows in gold and the gold equity plays, with the yellow metal having a solid low-high trend day through EU/early US trade and pushing to $3038, where we’ve seen better two-way flow kick in. The momentum in gold is hard to fight, and I remain biased to trade from the long side (or neutral), buying pullbacks until such time that price closes firmly below the 5-day EMA - it's clear that the buyers are stepping in on any displays of weakness, and unless there is an aggressive scalp to be had, gold is bull trending for a reason, and the market clearly likes the story – a close above $3041 would put $3095 in play and a level which I feel would temporarily cap the upside.

Crude Unenthused by the Trump-Putin Call

Crude has been at the centre of the rising geopolitical news flow from the Middle East of late, and along with other geopolitical hedges – Gold, CHF and US Treasuries – Crude has been well traded by clients. On the day, the sellers clearly had a better say and dominated the tape through early US trade, with Brent crude offered from $72.00 and printing a solid reversal, which has gone against a growing chorus of short-term bullish calls, most notably expressed through some punchy upside call (options) buying.

The news flow has centred on Trump’s call with Putin, which unsurprisingly stopped short of a full ceasefire agreement, but did result in a 30-day agreement to refrain from targeting energy and infrastructure facilities, a factor which is modestly negative of crude. Trump has naturally talked up the meeting as a highly positive affair, and while Russia-Ukraine ceasefire talks are ongoing, most feel that we’re no closer to anything truly tangible and a lasting agreement. We watch for further headlines around a ceasefire through Asia, as we do on developments in the Middle East, with US and Israel increasing strikes on Houthis sites.

In FX markets, outside of a move in the COP, the daily percentage changes in major FX rates have been quite orderly, although this masks the whippy intraday price action seen in the USD pairs. US Treasury yields are a touch lower with buyers stepping up through US trade, but the lack of any major move in yield has limited the moves in the USD pairs.

EUR traders were treated to a solid jump in the ZEW survey, as well as the approval of the German fiscal package through the Bundestag, which will now be passed to the Bundesrat on Friday for sign off – after pushing to 1.0955, EURUSD was pulled back to 1.0893 where these two levels defined what was a whippy intraday ride. EURAUD has been a better trade on the day for those wanting to express a constructive EUR stance, and after a retreat from 1.7400 to 1.7100, the flows are reversing, and it would not surprise to see further buying flows int this cross rate into Monday's EU PMIs.

The FOMC Meeting: Trading the Main Event

The focus for USD, UST and US rates traders now falls on the FOMC meeting, and while the Fed won’t change its policy setting on the fed funds rate, with new economic projections, a new set of ‘Dots’ and Jay Powell’s presser, the prospect for volatility in the latter stage of US trade is certainly a risk for exposures. There is some risk the Fed lower its 2025 dot from 3.875% to 3.60%, and closer to current implied market pricing - a factor which would initially negatively impact the USD - however, the more likely scenario is the central projections for the fund funds rate in 2025, 2026 and 2027 to remain unchanged from the projections seen at the December FOMC meeting. We should also see some massaging on the central expectations for inflation and growth, with the 2025 GDP estimate likely revised towards 1.7% (from 2.1%), while core PCE for 2025 may be lifted a touch to 2.6%.

With US swaps implying 58bp of cuts by December and the fed funds rate closer to 3.75%, the market is priced for a more near-term dovish lean from the Fed. That said, market pricing over a longer-term period implies a shallower path to cuts over the full cycle than what has been expressed in the Fed's prior projections, with the implied fed funds terminal rate set at 3.55% (or 78bp of cumulative cuts).

Of course, the market wants to ascertain the vicinity of the strike price on any Fed put, and if growth risks are manifesting, how close they could be to pulling the trigger on additional easing. US swaps imply the next 25bp cut in the June FOMC meeting, and that pricing will reconcile with the tone of the FOMC statement, as well as its economic projections and Powell’s presser, and that's where we could see some USD vol. We may also hear more about its balance sheet and the longevity of its QT program. I am skewed for USD upside risk from the meeting, but I wouldn’t trade the meeting myself, depending on if there were any real surprises I would look to fade any intraday rallies in the USD.

Good luck to all.