This is one of my favourite strips and it sums up well what has been happening to start the week:
It's all about emotions and extremes. We've gone from full-fledged panic and traders pricing in five rate cuts to a modest bounce yesterday. US stocks did see some selling late on but futures are pointing higher and risk sentiment is in a better spot today. S&P 500 futures are up 0.9% currently, with the index itself hoping to retest its 100-day moving average again later.
In terms of Fed pricing, we're seeing things calm down a fair bit too. The odds of a 50 bps rate cut in September are now at ~64% while there is ~103 bps of rate cuts priced in by December. At the height of the panic, traders were pricing in ~128 bps of rate cuts by year-end.
Despite the better mood in the last few sessions, it is best to be reminded that sentiment is still relatively fragile.
The worst might be behind us already but price action could still settle into a more volatile phase in the near-term.
So far today, the comments from BOJ deputy governor Uchida here is certainly helping. That's alleviating further pressure on Japanese yen pairs and helps to provide some relief for carry trades in general. That considering the yen currency has been the hot pick in pursuing carry trades over the last two years i.e. borrow the yen at lower rates to buy (mostly) US stocks. Hence, the so-called unwinding as these traders faced interest rate and also FX losses at the same time.
Is it all over though? It's tough to pick bottoms but a period of calm will certainly help. However, JP Morgan argues that there's still more pain to come though.
