This week is set to be intense for the markets. The US and China are meeting amid ongoing trade talks, raising expectations of maintaining the current temporary truce.
Tuesday will see the release of the JOLTS report, giving a glimpse of upcoming US jobs data during non-farm payrolls week. Australia’s quarterly CPI report for Q2 is anticipated on Wednesday, with a potential 25 bps rate cut expected by the RBA for August, with current odds at approximately 84%.
Key Monetary Decisions
Later, ADP employment figures and US Q2 GDP data are due, followed by monetary policy decisions from the Bank of Canada and Federal Reserve. Big tech earnings reports are also expected, with Meta and Microsoft reporting on Wednesday, and Amazon and Apple on Thursday.
Thursday will also bring the Bank of Japan’s monetary policy decision, with the US PCE price index and initial jobless claims coming in. Preliminary inflation data for July from several European countries will precede the Eurozone estimate on Friday, potentially influencing ECB’s actions in September.
The week will conclude with the US labour market report and trade headlines concerning the 1 August deadline, complemented by month-end trading flows, complicating the market analysis.
With so many market-moving events packed into one week, we believe overall volatility is underpriced. This suggests that buying options, such as puts on the S&P 500, could be a prudent way to hedge against negative surprises from any of the major data releases. The CBOE Volatility Index (VIX), often called the market’s “fear gauge,” has already risen to over 14, up from lows near 12 earlier this month, signaling growing anxiety.
Federal Reserve Policy Impact
We should prepare for the Federal Reserve’s policy announcement to create significant price swings, particularly based on what Chairman Powell signals about future policy. While the CME FedWatch Tool shows a 99% probability that rates will be held steady, any hint of a more hawkish stance could roil markets. Traders could use straddles on index ETFs like SPY to position for a large move in either direction following his press conference.
The earnings from major technology firms will be a major focus, as these stocks have driven much of the market’s recent gains. Options markets are pricing in a potential post-earnings move of over 4% for Microsoft and over 7% for Meta. Selling premium through strategies like short strangles or iron condors could be profitable if we believe the actual stock reaction will be tamer than what the market is pricing in.
For currency traders, the Australian inflation report is a key event, given the market is already anticipating an interest rate reduction. Historically, the AUD/USD pair has dropped significantly following rate cuts, including a fall of over 0.7% within hours of the surprise RBA decision in May 2023. We see value in buying put options on the Australian dollar to capitalize on a potentially dovish outcome.
The week culminates with the American labor market report, which will heavily influence the dollar and bond yields. A non-farm payroll number that deviates significantly from the consensus forecast of 184,000 could easily cause a rapid move of over 1% in the U.S. Dollar Index (DXY). Positioning in short-dated currency options offers a direct way to trade this binary event.
